In 2016, as a response to the many risks posed by shadow banking, the EU introduced the Securities Financing Transaction Regulation (SFTR), a set of new requirements aimed at improving the transparency of Securities Financing Transactions (SFTs).
SFTs provide market participants with the opportunity to access secured funding through the temporary exchange of their collateralised assets as a guarantee. Lending or borrowing securities and commodities, repurchase (repo) or reverse repurchase transactions (reverse repo) and buy-sell back or sell-buy back transactions, including collateral and liquidity swaps, are some typical examples of SFTs.
The SFTR introduces, among others: a) a transaction reporting obligation in respect of securities financing transactions; b) an obligation to make prescribed pre-contractual disclosures to Undertaking for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIF) investors in respect of SFTs and total return swaps in the UCITS/AIF prospectus and annual return, and; c) provisions for minimum transparency requirements relating to the “re-use” of collateral (financial instruments only) under financial collateral agreements.
The SFTR requires both financial and non-financial market participants to report details of their SFTs to an approved EU Trade Repository (TR). In order to align reporting standards to the maximum extent possible, the European Securities and Markets Authority (ESMA) has developed its reporting standards for SFTs building on its experience with the European Market Infrastructure Regulation (EMIR) and other EU-wide reporting regimes.
Transactions that must be reported under SFTR include, repurchase transactions, securities or commodities lending and borrowing, buy-sell back and sell-buy back transactions, margin lending transactions, collateral swaps, liquidity swaps, modifications, collateral updates and valuations, margin valuations for CCP-cleared transactions, collateral reuse and margin lending funding sources and transaction terminations and positions for CCP-cleared SFTs, if opting to report modifications and collateral updates at the position-level.
Broadly speaking, the SFTR applies to all EU financial and non-financial counterparties, including all branches irrespective of their location, as well as the EU branches of non-EU entities.
What should affected firms do?
Affected firms are faced with the challenge of selecting a TR or a third-party agent that best suits their reporting needs in terms of cost and operational efficiency. Another challenge is to analyse the SFTR’s requirements and produce an action plan for compliance based on their business and/or operations. In terms of reporting, firms should also produce sample reports based on the nature of the transactions they carry out. Once a firm fully understands the requirements and drafts their report templates, it has to develop systems to automate report generation while ensuring consistency and accuracy. This process requires careful organisation and coordination between the dealers and compliance and IT personnel.
Complying with the regulatory obligations introduced by SFTR is costly, both in terms of labour and capital. Careful planning and regulatory expertise is required to meet the challenge of analysing the regulation’s obligations and developing the technical means and infrastructure to cope with the requirements. Furthermore, reporting to TRs entails out-of-pocket costs, and the reporting and reconciliation process might take substantial amount of time if not done automatically.
Furthermore, firms should consider their internal resources and, where required, hire an experienced external consultant to assist with the relevant tasks. A suitable compliance advisor should be able to bridge the gap between law and practice, identify and find solutions to problems, and help affected firms dealing with shortages in resources comply with SFTR.
In today’s financial services sector, businesses are largely driven and impacted by developments in the regulatory landscape. Financial institutions are under heightened scrutiny, and there is a need to invest significantly in compliance to protect organisations from reputational damage and costly penalties.
Given the above, it is paramount that affected firms begin as soon as possible their preparations to comply with SFTR.
How can MAP S.Platis assist you?
MAP S.Platis can assist in the following ways:
- Prepare a tailored Gap Analysis including the changes that will affect your organisation’s current setup;
- Conduct compliance health-checks;
- Provide tailored rectification measures best suited for each firm’s modus operandi;
- Develop a tailored and practical action plan for compliance;
- Devise and recommend tailored and practical solutions;
- Submit relevant information to and communicate with regulatory authorities on your behalf;
- Update existing policies and procedures;
- Draft new policies and procedures;
- Provide answers to queries (Q&A service), and;
- Train and educate employees on new and existing regulatory requirements.
Why MAP S.Platis?
MAP S.Platis is the leading financial services consulting group in Cyprus, whose clients include regulators, banks, funds and fund managers, investment firms, insurance companies and payment and electronic money institutions. Our expert team provides unique and tailored solutions in licensing, regulatory compliance, risk management, internal audit, human resources, banking, regulatory technology, executive training, and innovation consulting to financial institutions in Cyprus and the EU.
MAP S.Platis Group is internationally recognized and awarded for its regulatory compliance expertise. Our group can support any of our client’s regulatory needs, both efficiently and effectively, thanks to our vast regulatory compliance experience, continued interaction with regulatory authorities, multidisciplinary teams of professionals with diverse backgrounds, unparalleled track record, global network of associates and depth of resources.
For more information on our services, please contact our team at firstname.lastname@example.org.