A Refinitiv Expert Talk takes a critical look at the Securities Financing Transaction Regulation (SFTR) and how firms can develop a best-practice approach to compliance.
- The SFTR, a European regulation, is designed to mitigate risk within Securities Financing Transactions (SFTs) — transactions where securities or assets are used to secure funding.
- The SFTR affects a range of financial institutions, including multi-nationals with branches in Europe. It is data-intensive, creating a core challenge for firms to be able to access, collate and report accurate data to the European Securities and Markets Authority (ESMA) within required reporting times.
- Refinitiv delivers regulatory-specific reference data that is robust and reliable and can help firms to implement a best-practice response to the SFTR.
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The SFTR is a European regulation governed by the European Securities and Markets Authority (ESMA). It was designed to mitigate risk within Securities Financing Transactions (SFTs), which are transactions where securities or assets are used to secure funding.
Specifically, the European Commission (EC), identifies an SFT as:
- A repurchase transaction — selling a security and agreeing to repurchase it in the future for the original sum of money, plus a return for the use of that money.
- Lending a security for a fee in return for a guarantee in the form of financial instruments or cash given by the borrower.
- A buy-sell back transaction or sell-buy back transaction.
- A margin lending transaction.
Ongoing concerns relating to the collateral used in SFTs ultimately led to the introduction of the SFTR.
These concerns center on the quality and fair use of such collateral, which, if re-used, can lead to a situation where significant sums are underpinned by inadequate collateral.
This by default raises inherent risk levels, because challenging trading conditions, when they inevitably arise, can expose an underlying security shortfall.
What does the SFTR require?
- All SFTs to be reported to central databases called trade repositories within a specified time frame.
- Specific rules and minimum transparency for the re-use of securities posted as collateral to SFTs.
- Undertakings that the use of SFTs will be disclosed by investment funds.
There is a range of first reporting dates under the SFTR. The July 2020 implementation date for credit institutions, investment firms, central counterparties (CCPs), central securities depositories (CSDs), and relevant third-country entities has already passed.
Insurance companies, funds, institutions for occupational retirement provision (IORPs) and relevant third-country entities have a first reporting date of 12 October 2020. Non-financial counterparties are due to report from 11 January 2021.
The data challenge
The SFTR has a broad reach, with a range of financial institutions including, but not limited to, banks, investment firms and insurance companies obliged to comply with its requirements.
Moreover, even though the SFTR is a European regulation, it applies to multi-nationals with branches in Europe.
Data-intensive in nature, the regulation creates a data challenge for compliance teams because they must source and collate data that is relevant and accurate. Firms may struggle to access all the required data fields, particularly given the time limits for reporting to ESMA.
Developing a best-practice response
Refinitiv, as a trusted partner, can help firms to develop a best-practice response to the SFTR — one that is effective and efficient, and which begins with a solid foundation of robust, reliable data.
A broad range of data
The SFTR requires firms to report a broad range of data fields. Refinitiv provides reference data fields that can be used to classify any underlying security or collateral referenced by an SFT. We have also created new data fields to support classification and collateral quality requirements.
We ensure that our data is consistently robust and accurate. Refinitiv continually monitors data quality metrics to track the accuracy, timeliness, and completeness of our data.
A dynamic response
In a dynamic regulatory environment, we stay abreast of new regulatory specific data requirements.
Fields are delivered to our customers via DataScope Select — our strategic data delivery platform for non-streaming content — and DataScope Plus, our solution for bulk pricing, reference, and entity data requirements.