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 second SFTR update for ICMA members takes a closer look at the final SFTR implementation timetable, the reconciliation requirements as well as the different reporting responsibilities and configurations under SFTR.
 

1. Final timetable set for implementation of SFTR
2. Final timetable set for introduction of matching by trade repositories of data fields reported by banks & investment firms
3. Who is actually responsible for reporting?
4. Reporting repos with small EU non-financial corporates
5. The ICMA ERCC SFTR Task Force

 

 

1. Final timetable set for implementation of SFTR

Following the end of the scrutiny period on 13 March, the full package of SFTR Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) was published on 22 March in the EU’s Official Journal. In total, this consists of 10 different delegated and implementing regulations, including the relevant RTS and ITS Annexes.
 
In terms of the SFTR implementation timeline, this means that the RTS and ITS will enter into force on 11 April 2019 (which is the 20^th day after publication) and will then apply as follows:     

• 11 April 2020: reporting go-live for banks and investment firms, which is 12 months after entry into force
• 11 July 2020: reporting go-live for CCPs & CSDs, which is 15 months after entry into force
• 11 October 2020: reporting go-live for the buy-side, which is 18 months after entry into force
• 11 January 2021: reporting go-live for non-financial counterparties (NFCs), which 21 months after entry into force.

 
Some of these dates are on weekends, so the effective go-live dates will be one or more days later than the legal date. And unfortunately, 11 April 2020 is Easter Saturday!
 
We’ve updated our implementation table with these dates.
 
The dates will also be used to phase in the matching requirements for various data fields (see next section).
 

 

2. Final timetable set for introduction of matching by trade repositories of data fields reported by banks & investment firms

 

A wide range of data fields reported to the trading repositories (TRs) will be “reconciled” (matched) by the TRs. Some matches have to be exact and some within defined tolerances. Most matching will begin when the transaction reporting obligations come into effect but the matching of a few data fields will be introduced, in the case of repo, in two later stages. The table below summarizes when various data fields start to be matched (references beginning with 1 are to counterparty data, ie from table 1 of the RTS & ITS Annexes, and those beginning with 2 are to loan & collateral data, ie from table 2 of the Annexes).

Please note that these dates apply to the data fields for repo only.
 

start date for matching by TR	repo data fields
Tuesday 14 April 2020 = go-live (G) (although the legal go-live is Saturday 11 April: note also that this is during Easter weekend)	1.3, 1.9 1.11 2.1, 2.4, 2.5, 2.7, 2.8, 2.9 2.12, 2.13, 2.14, 2.15 2.20, 2.21, 2.23, 2.24, 2.25, 2.26 2.30, 2.31, 2.32, 2.37, 2.38, 2.39 2.73, 2.74, 2.75, 2.76, 2.77, 2.78, 2.79 2.83, 2.85, 2.89 2.90, 2.91, 2.92, 2.93, 2.94, 2.95, 2.96, 2.99
Tuesday 11 April 2022 = G+24 months	2.86, 2.87, 2.88
Wednesday 11 January 2023 = G+33 months	2.6 2.16, 2.17, 2.18, 2.19 2.22, 2.27, 2.28, 2.29 2.35, 2.36 2.49

 

3. Who is actually responsible for reporting?

 

3.1    Who are the entities involved in reporting?
 

• Reporting Counterparty (RTS Table 1, field 3) is an entity who is a contracting party to the repo which is being reported. In repo, unless unusual legal arrangements such as trusts are being employed, the Reporting Counterparty will also be the Beneficiary (Table 1, field 13). And unless this entity is a UCITS, AIF or small non-financial EU entity,¹ it will also be the Entity Responsible for the Report, that is, the entity who is responsible to regulators for ensuring timely, accurate and comprehensive reporting (see section 3.2 below).
• Entity Responsible for the Report (RTS Table 1, field 10) is the entity who is held responsible by regulators for ensuring timely, accurate and comprehensive reporting. It cannot lose that responsibility by outsourcing the operation of reporting to a third-party service-provider. This entity will usually be the Reporting Counterparty but it could be:
  (1) a UCITS management company or an AIF manager reporting on behalf of their funds (the funds will be the Reporting Counterparties) --- this delegation of reporting responsibility is mandated by SFTR; or
  (2) a financial counterparty who is trading with a small non-financial EU entity¹--- this delegation of reporting responsibility is mandated by SFTR.
• Report Submitting Entity (RTS Table 1, field 2) is a purely operational role and imposes no responsibility to the regulator for the quality of the data in the report. This entity could therefore be:
  (1) the Reporting Counterparty; or
  (2) the Entity Responsible for the Report if that is not also the Reporting Counterparty, in which case, it will be one of the three alternative types of entity identified in the previous section (a UCITS management company or AIFM reporting on behalf of a UCITS or AIF, respectively or an EU financial counterparty reporting on behalf of a small non-financial EU entity; or
  (3) a third-party service-provider to whom the Reporting Counterparty or Entity Responsible for the Report has outsourced the operation of reporting.
• Beneficiary (RTS Table 1, field 13) is the legal entity who is exposed to the risk and is entitled to the return on a repo. In repo, the Beneficiary is likely to be:
  (1) a fund on behalf of whom an Agent Lender contracts;
  (2) a small non-financial EU entity trading with an EU financial counterparty to whom SFTR mandates the role of the Entity Responsible for the Report on behalf of the small non-financial entity; or
  (3) in all other cases, the Reporting Counterparty.
• Agent Lender (RTS Table 1, field 18) is a legal entity who is employed to transact repos on behalf of one or more funds. The Agent Lender signs a GMRA on behalf of each fund and negotiates repos but is not a principal in such an agency repo and is therefore not exposed to the risk and is not entitled to the return on that repo. Instead, the Agent Lender is remunerated with fees and commissions. Any fund on behalf of whom an Agent Lender transacts is the Reporting Counterparty and the Beneficiary. The Agent Lender will not be the Entity Responsible for the Report or the Report Submitting Entity but will be required to provide information to those entities.

 
3.2    Reporting configurations
 
In principal-to-principal repos, the Entity Responsible for the Report (1.10) will also be the Reporting Counterparty (1.3) and the Beneficiary (1.13). Unless it has outsourced the operation of reporting, the Entity Responsible for the Report will also be the Report Submitting Entity (1.2).
 
However, in the case of an agency repo, on the agent’s side, the Agent Lender (1.18) will be the Entity Responsible for the Report (1.1) and, unless it has outsourced the operation of reporting, it will also be the Report Submitting Entity (1.2). The fund for whom the Agent Lender is acting will be the Reporting Counterparty (1.3) and the Beneficiary (1.13).
 
In the case of repos with UCITS and AIF, the manager will be the Entity Responsible for the Report (1.1) and, unless it has outsourced the operation of reporting, it will also be the Report Submitting Entity (1.2). The fund for whom the manager is acting will be the Reporting Counterparty (1.3) and the Beneficiary (1.13).
 
In the case of repos with a small non-financial EU entity transacting with an EU financial counterparty, the latter will be the Entity Responsible for the Report (1.1) and, unless it has outsourced the operation of reporting, it will also be the Report Submitting Entity (1.2). The small non-financial EU entity will be the Reporting Counterparty (1.3) and the Beneficiary (1.13).
 
These configurations are summarised in the table below.
 

party A	party B	in report by party A (assuming no outsourcing of reporting)
		1.2 Report Submitting Entity	1.3 Reporting Counterparty	1.10 Entity Responsible for the Report	1.13 Beneficiary	1.18 Agent Lender
principal	principal	A	A	A	A	n/a
agent	principal	A	fund	A	fund	A
UCITS management company or AIFM	principal	A	UCITS or AIF	A	UCITS or AIF	n/a
small non-financial entity	financial entity	B	A	B	A	n/a

 

 

4. Reporting repos with small EU non-financial corporates

 

Article 4(3) of SFTR delegates the reporting of SFTs concluded between a financial counterparty and a small non-financial EU counterparty, as well as the reporting of the re-use of collateral by the latter, to the financial counterparty. This obligation will apply from 11 January 2021.
 
Note that this mandatory delegated reporting obligation applies only to SFTs concluded with non-financial counterparties established in the EU.
 
However, if a non-financial counterparty established in the EU concludes an SFT with a financial counterparty established outside the EU which is operating through an office located outside the EU, the latter is not subject to the SFTR, so the EU non-financial counterparty would be responsible for its own reporting.
 
Small non-financial counterparties for the purpose of SFTR are defined by reference to the definition of ‘medium-sized undertakings’ in Article 3(3) of the EU Accounting Directive (2013/34/EU) 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: EUR 20 000 000;
• net turnover: EUR 40 000 000;
• average number of employees during the financial year: 250.

 
However, many of these small non-financial counterparties will be unable to transact repos because Article 16(10) of MiFID II prohibits the transaction of repo and other transactions under a title transfer collateral arrangement with retail clients.² The definition of retail in MiFID includes undertakings falling below at least two of the following criteria:

• balance sheet total: EUR 20 000 000;
• net turnover: EUR 40 000 000;
• own funds at least: EUR 2,000.000.

 
Under SFTR Article 4(3), it appears to be the responsibility of the financial counterparty to determine whether a non-financial counterparty falls within the definition of small for the SFTR. The financial counterparty would therefore have to rely on the annual accounts of the non-financial counterparty. These have to be published within 12 months of the balance sheet date. It would be prudent for financial counterparties to assess in advance of 11 January 2021 which, if any, of their customers is currently or could fall into the category of small non-financial counterparty for the purpose of SFTR within the following year and put in place measures to monitor their status and, if necessary, to fulfil their delegated reporting duty.

 

5. The ICMA ERCC SFTR Task Force

The ICMA ERCC SFTR Task Force was created in 2015 and includes representatives from over 100 ICMA member firms covering the whole spectrum of the market, including buy-side, sell-side, market infrastructures, but also Trade Repositories and other service providers looking to develop solutions to help reporting firms comply with SFTR. The main objective of the ERCC SFTR Task Force is to develop a common understanding of the SFTR reporting requirements and to develop market best practices in relation to SFTR reporting to complement guidance provided by regulators. The work is undertaken in close collaboration with other trade associations and the relevant regulators, in particular ESMA.

For further information about ICMA’s work in relation to SFTR and the ERCC SFTR Task Force, please visit our SFTR webpage or contact Alexander Westphal.