What is SFTR? A Whirlwind Tour of the 3 Limbs

What is SFTR? A Whirlwind Tour of the 3 Limbs

What is SFTR?

SFTR: Security Financing Transactions Regulation.

  • Formally, Regulation (EU) 2015/2365…on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012.
  • It was adopted on 25 November 2015.


SFTR is built on three pillars[i]:

  1. Transaction Reporting. Requirements for counterparties to SFTs to report all SFTs to central trade repositories;
  2. Client Disclosure requirements for investment funds to disclose the use of SFTs to investors in their regular reports and pre-contractual documents;
  3. Minimum transparency conditions for the reuse of collateral received in a SFT (rehypothecation), such as the disclosure of the resulting risks and consequences as well as prior consent by the counterparty providing collateral.


  • Re: Pillar I. The gross amount of outstanding repos (one type of SFT) by EU counterparties alone is estimated at €5.5tn. SFTs lead to the build-up of [ii] This is difficult to assess due to a lack of granular data (e.g. the volume of margin lending transactions, data on the reinvestment and reuse of collateral) and the potentially different purposes for which SFTs are undertaken. The transaction-level reporting obligation introduced with SFTR will enable authorities to better analyse the implications of SFTs in terms of creating leverage.[iii] These data will also allow authorities to implement appropriate qualitative standards for the calculation of haircuts and numerical haircut floors, thereby fulfilling outstanding FSB recommendations 12-18.[iv] [haircuts refers to a reduction applied to the value of an asset. It is expressed as a percentage. Loans are typically overcollateralised, i.e. a €1 million loan may demand €1.2 million in collateral, thereby mitigating market risk as the collateral could potentially lose value, thereby exposing the lender to credit risk. More information here.[v]]


  • Re: Pillar II. The use of SFTs and total return swaps (TRSs) could increase the general risk profile of the collective investment undertaking whereas their use is not properly disclosed to investors. It is crucial to ensure that investors in such collective investment undertakings are able to make informed choices and to assess the overall risk and reward profile of collective investment undertakings. Investments made on the basis of incomplete or inaccurate information as regards a collective investment undertaking’s investment strategy can result in significant investor losses. It is therefore essential that collective investment undertakings disclose all relevant detailed information linked to their use of SFTs and TRSs.[vi]


  • Re: Pillar III. Reuse of collateral provides liquidity and enables counterparties to reduce funding costs. However, it tends to create complex collateral chains between traditional banking and shadow banking, giving rise to financial stability risks. The lack of transparency on the extent to which financial instruments provided as collateral have been reused and the respective risks in the case of bankruptcy can undermine confidence in counterparties and magnify risks to financial stability.[vii] In short, unchecked collateral rehypothecation represents systemic risk.


Application Schedule

  • The Transaction Reporting obligation will commence:
    • 12 months after the level II RTS/ITS appear in the Official Journal for MiFID II Investment Firms and CRD IV Credit Institutions (+ third-country equivalents);[viii] [approximately Q2 2019]
    • 15 months for EMIR ‘central counterparties’, CSDs (+ third-country equivalents);
    • 18 months for UCITS, AIFMs (+ third country equivalents); [ix]
    • 21 months for NFC (+ third-country equivalents). [x]
  • Pillars II and III are already in force.


SFTR’s interface with other EU Law

  • SFTR interfaces strongly with EMIR with respect to Transaction Reporting. Indeed, EMIR is referenced in SFTR’s official name (per above).
  • SFTR interfaces with UCITS[xi] and AIFMD[xii] in terms of periodic reporting and disclosure requirements.
  • There is limited interface with MiFID II in terms of Title Transfer Collateral Agreements.


General Notes

  • Whistleblowing. NCAs to establish effective mechanisms to enable reporting of actual or potential infringements, including secure channels and protection for employees against retaliation and discrimination.[xiii]
  • The Commission is empowered to modify SFTR’s scope[xiv] for an indeterminate period of time.[xv] However, this may be revoked at any time by the European Parliament or by the Council.[xvi]


This excerpt was taken from Seb Malik’s SFTR: A Survival Guide. Seb Malik is a bestselling author and leading financial regulation expert based in London. It is copyrighted material reproduced with permission.

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[i] (Commission, 19.10.2017) p.7
[ii] Refer to ESMA’s Report on securities financing transactions and leverage in the EU.; ESMA/2016/1415
[iii] (Commission, 19.10.2017) p.5
[iv] (Commission, 19.10.2017) p.9
[v] https://www.ecb.europa.eu/explainers/tell-me-more/html/haircuts.en.html
[vi] SFTR Recital 15.16
[vii] SFTR Recital 21
[viii] SFTR Article 33(2)(a)(i)
[ix] SFTR Article 33(2)(a)(iii)
[x] SFTR Article 33(2)(a)(iv)
[xi] https://www.esma.europa.eu/sites/default/files/library/esma34-43-392_qa_ucits_directive.pdf
[xii] https://www.esma.europa.eu/sites/default/files/library/esma34-32-352_qa_aifmd.pdf
[xiii] SFTR Article 24
[xiv] SFTR Article 2(4)
[xv] SFTR Article 30(2)
[xvi] SFTR Article 30