SFTR Level III Briefing Note

SFTR Level III Briefing Note

Yesterday (27 May 2019), ESMA delivered its Consultation Paper for SFTR guidance in which it expressed its views, seeking industry comment. This document contains the main points.

  • This document should be read in conjunction with our updated Excel field validation specification available here.
  • ESMA’s Level III document here.

 

Briefing note from Market FinReg – Seb Malik – Head of Financial Law. seb.malik@marketfinreg.com

Feedback and comments welcome by email.

Market FinReg will be updating its hugely successful  SFTR course , offered in conjunction with Regis-TR, to include additional guidance. Next training dates in London, Luxembourg, Madrid, Frankfurt to be published shortly – stay in touch.

 

Contents

Non-reportable transactions. 2
Repos. 3
BSB. 3
Sec. Lending. 3
Margin Lending (Prime Brokerage) 3
CCP-cleared SFTs. 3
Branches. 4
Identification of CSD participant 4
Amendments – full snapshot or only changed field?. 4
Valid Sequence of Events. 4
Phased-in reporting – early reporting allowed for latter counterparties. 5
Backloading. 5
Jurisdiction of issuer LEI problems. 5
General or specific collateral 5
Collateral reuse. 6
Cash reinvestment 6
Fields. 7
Field 2.56. 7
Field 2.57. 7

 

Non-reportable transactions

 

  1. List of transactions not reportable under SFTR.[1] Some are existing, others new:
  2. Retail client lending (except when it is against an irrevocable trust)
  3. Private banking and Lombard loans
  4. Syndicated lending and other corporate lending8 for commercial purposes
  5. Overdraft facilities of custodians and CCP daylight lending facilities
  6. Intraday credit / overdraft fails-curing
  7. T2S auto-collateralisation
  8. Intermediate give-ups and take-ups
  9. Transactions involving emission allowances

also (later on)

Collateral taker sells commodity to collateral provider with option to buy back/repurchase – not reportable under SFTR.[2]

 

Repos

  1. Allocation of loans between two or more collateral takers and two or more collateral providers, an SFT is defined as each collateralized loan of securities, cash or commodities, between two counterparties.[3]
  2. Repos collateralised in different currencies are reportable as separate transactions – one per ccy.[4]

BSB

  1. BSB – Table 2 Fields 9-11, changed to M or C – following feedback from industry that BSB do indeed have master agreements.

Sec. Lending

  1. SLB for transfer of >1 ISIN – separate SFTR report per ISIN.[5]
  2. Reportable: funds that aggregate securities in an asset pool and can lend them. These funds trade through a broker that will act as an agent and lend a security for a given quantity out of the pool of assets of the funds. [6]
  3. How to report reverse sec lending? Resemble repos, but some information might be lost e.g. rebate rate – question asked.[7]

 

Margin Lending (Prime Brokerage)

  1. When credit extended drops to 0 – use MODI, not ETRM. [8]

 

CCP-cleared SFTs

  1. Acknowledgement of industry concerns regarding practicality of reporting on position level for repos due to fungibility problems: “but, in repo, it means that separate positions would have to be reported for each settlement date and, on each date, separate positions would have to be reported for each currency and each ISIN. This would make position-reporting more complicated than it might initially appear.” [9]

 

Branches

    1. Clarification on what constitutes “if the SFT is concluded in the course of the operations of a branch”.[10] Minimum ones are:

– where the branch received the order from a client or made an investment decision for a client in accordance with a discretionary mandate given to it by the client;
– where the branch has supervisory responsibility for the person responsible for the investment decision concerned;
– where the branch has supervisory responsibility for the person responsible for execution of the transaction;
– where the transaction was executed on a trading venue or an organised trading platform located outside the Union using the branch’s membership of that trading venue or an organised trading platform.

 

Identification of CSD participant

  1. Counterparties should populate the CSD participant field in all cases, even if the SFT settles outside of a CSD. ESMA expects that the reporting counterparty should report:a) its own LEI if it is settling directly at any CSD, i.e. it is a CSD participant;

b.its own LEI if it is settling securities at any of the two ICSDs even where these are not the issuer CSD, i.e. it is an iCSD participant;

the LEI of its custodian bank irrespective of whether the custodian is using any sub-custodian or not.

 

The counterparties should not report the LEI of the CSD in which they are either direct or indirect participants.[11]

 

 

Amendments – full snapshot or only changed field?

  1. ESMA consulting on best approach.[12]

 

Valid Sequence of Events

  1. ESMA provides details.[13]

 

Phased-in reporting – early reporting allowed for latter counterparties

  1. Should the non-banking counterparties find it easier, they could start reporting in advance of the relevant reporting start date.[14]

 

Backloading

  1. When the SFTs are backloaded for the first time, only the state at the time of reporting should be reported. The previous lifecycle events should not be reported separately.[15] [what MFR has been advising all along!]

Jurisdiction of issuer LEI problems

  1. Acknowledgement of problem – ESMA consulting on volumes.[16]

 

General or specific collateral[17]

Approach A:

For repos and BSB, “General Collateral” would be the default option, describing not only multi-collateral repos (i.e. against collateral baskets or pools) but also transactions in which single collateral is traded at (or close to) the prevailing GC rate, and repos in which cash is part of the collateral.

For securities lending, “Specific Collateral” would be the default option, except for cash-driven transactions e.g. in the context of triparty services or “reverse securities loans” by CCPs, where the transaction’s lending fee reflects the prevailing GC fee.

Approach B:

The second approach is to take a more restrictive definition of general collateral, which would only apply in the context of GC facilities provided by an Automatic Trading System such as those run by CCPs, and transactions in which the collateral is managed by a triparty agent. Aside from specific collateral transactions, the default option for all other SFTs would then be to leave the “General Collateral Indicator” field empty.

The main difference between these two approaches is whether cash-driven bilateral trades that do not take place on a GC facility but trade nonetheless at or close to the prevailing GC refinancing rate should be considered as general collateral. Industry input suggests that reconciliation might be problematic in the first case as the two counterparties may not rely on the same definition of general collateral.

ESMA proposes to introduce a dependency in the validation rules. “General Collateral indicator” should be:

a. Left empty if the “Uncollateralised SLB” (field 2.72) flag is “TRUE”.
b. “SPEC” where specific collateral is used in SFTs and the “Type of collateral component” (field 2.75) is “SECU”.
c. “GENE” depending on which of the two approaches outlined above is adopted.

 

Collateral reuse[18]

  1. Formula applies to securities collateral. Confirmation that assets own must be populated. Does this mean entities do indeed need to track their inventory of that security?Example: if Bank ABC owns 500 in security A, receives a further 1,000 in security A as collateral from a reverse repo, and uses 600 of security A as collateral to borrow another security, the estimated re-use that should be reported by Bank ABC for security A is: [(1,000)/(1,000+500)]*600=400.
  2. (collateral received,eligible_for_reuse): the market value of collateral of type j received by entity i that is eligible for re-use. Includes: sec. received as collateral in reverse repo and BSB; sec. borrowed in sec. borrowing; sec. received as collateral in sec. lending; sec received as additional collateral to meet VM originating from SFTs.
    (assets own): assets of the same type j owned by entity i.
    (collateral posted): sec. posted as collateral in repos and BSB; sec. on loan in sec. lending; sec. posted as collateral in sec. borrowing; sec. posted as additional collateral to meet VM requirements originating from SFTs.

Cash reinvestment[19]

 

  1. Clarification that formula does not apply – no need to track against your total cash holding!! Rather only enter the re-investment rate in field 4.11, together with amount in 4.13

 

Fields

We have included our comments on fields in a new column in the Excel field validation spec. Here are some additional comments.

 

Field 2.56[20]

Loan value = qty * sec. price

Reported in local ccy, excluding haircut or margin

 

Field 2.57[21]

Market Value problematic – but still must be reported

To calculate this, market participants rely on the market price of the security which is denominated in the local currency of the security. However, the currency of the loan and of the security can sometimes differ. This implies that a currency conversion would be required in order to report both “Loan value” (field 2.56) and “Market value” (field 2.57) in the same “Price currency” (field 2.50).

 

Need to fix/agree on FX rates.[22]

 

Market FinReg will be updating its hugely successful SFTR course , offered in conjunction with Regis-TR, to include additional guidance.

 

References

[1] Para. 46/p.19
[2] Para. 74
[3] Para. 51
[4] Paras. 56-58
[5] Para. 65
[6] Para. 68
[7] Para. 73
[8] Para. 83
[9] Para. 85
[10] Para. 102
[11] Paras 121-122
[12] Paras 130-136
[13] Paras 137 (and following Tables)
[14] Para 188
[15] Paras 171-172
[16] Q41, p.49
[17] Paras 264-267
[18] Level III CP: section 6.4.1; p.151
[19] Level III CP: section 6.4.2; p.157
[20] Para. 152
[21] Para. 153
[22] Q.35/p.44