www.pwc.ch
Out of the shadow into
the light: A new set of rules
for securities financing
transactions and collateral –
The SFTR
1.
Latest news
Currently the European Securities and Markets Authority (ESMA) is inviting responses to specific questions listed in
draft Regulatory Standards (RTS) and draft Technical Standards (ITS) under SFTR, and amendments to related EMIR
RTS, all of which is published on the ESMA website. The responses must be submitted online to ESMA by 30
November 2016.
On 4 October 2016 ESMA has issued a report on securities financing transactions, leverage and pro-cyclicality in the
EU’s financial markets. ESMA’s report assesses whether the use of SFTs leads to the build-up of leverage which is not
yet addressed by existing regulation, how to deal with such build-up, and whether there is a need to take further
measures to reduce its pro-cyclicality.
ESMA’s report was prepared in cooperation with the European Banking Authority and the European Systemic Risk
Board. The report recommends to:

introduce the Financial Stability Board’s (FSB) qualitative standards in the methodology used to calculate
haircuts

address the pro-cyclicality of collateral haircuts in central counterparties in the context of the European Market
Infrastructure Regulation (EMIR) review

assess the possible extension of the FSB’s scope for numerical haircut floors, and the calibration of these floors
using SFTR data which will become available in 2018

assess pro-cyclicality and the potential need for further policy tools once sufficient data becomes available
In order to be best prepared to cope with the upcoming challenges, we would like to shed some light on SFTR and help
you understand the next steps in its implementation.
2.
SFTR in a nutshell
On 12 January 2016 the Regulation on
Transparency of Securities Financing
What is a “securities financing transaction”?
Transactions and of Reuse (SFTR) entered
A securities financing transaction or “SFT” is defined as:
into force. As part of the EU initiative on “shadow
 a repurchase transaction;
banking”, the regulation is aimed at improving
 securities or commodities lending and securities or
transparency in the securities financing
commodities borrowing;
transactions (SFT) market to prevent banks and
 a buy-sell back transaction or sell-buy back transaction; or
other financial intermediaries from circumventing
 a margin lending transaction.
banking regulations by shifting parts of their
activities to the “shadow banking sector”, a complex
network of credit intermediation outside the regulated banking sector. The SFTR provides a set of measures featuring
new requirements on the transparency of SFTs, total return swaps and reuse of financial instruments received under a
collateral arrangement.
Furthermore, the SFTR introduces new disclosure requirements for managers of UCITS and AIFs.
On 11 March 2016, ESMA published its first Discussion Paper (DP) on draft Regulatory Technical Standards (RTS)
and draft Implementing Technical Standards (ITS) under the SFTR. The Discussion Paper outlines the overall
framework for the reporting of SFTs to trade repositories (TRs), in particular for:
• the data fields to be included in reports to trade repositories (for various types of SFTs);
• requirements for the registration of trade repositories; and
• deviations from or enhancements to the EMIR reporting framework.
Consultation on the draft technical standards concluded on 22 April 2016. ESMA is expected to publish the final draft
technical standards by the end of 2016.
3.
What are the next steps in the implementation?
12 January 2016
Effective Date
Disclosure obligation
begins to apply for
pre-contractual
documents in the case
of funds constituted
on or after the SFTR
enters into force.
11 March 2016
ESMA issued a
first discussion
paper on draft
technical
standards.
4.
22 April 2016
End of the
public
consultation
phase on draft
technical
standards.
End of 2016
ESMA is
expected to
publish
finalised draft
technical
standards.
13 January 2017
Latest possible
submission date of
“Draft RTS and ITS
under SFTR” to the
European
Commission.
Today
13 July 2016
Requirements
on reuse of
collateral
apply to
counterparties.
30 November
2016
Submission of the
responses to the
specific questions
listed in the draft
technical standards.
13 January 2017
UCITS and AIFMs
to disclose their
use of SFTs and
total return swaps
in the periodic
reports.
Q1 2018
Reporting obligation
begins to apply for
investment firms
authorised under MiFID
II, credit institutions
authorised under CRD IV
legislation and third
country entity
equivalents.
13 July 2017
UCITS and AIFMs
to disclose their use
of SFTs and total
return swaps in the
pre-contractual
documents.
Q 4 2018
Reporting obligation
begins to apply for
non-financial
counterparties and
third country
equivalents.
Q 3 2018
Reporting obligation
begins to apply for
UCITS, AIFs managed
by AIFMs and third
countries entity
equivalents.
Who is affected by the SFTR?
The requirements apply to “counterparties”. According to the definition in SFTR Art. 3 (2), counterparties include
“financial counterparties” and “non-financial counterparties”. The definition of a financial counterparty in SFTR
Art. 3 (3) covers:
Investment firms authorised according to MiFID II
Credit institutions authorised according to CRD IV
Insurers and reinsurers authorised according to Solvency II
Central counterparties (CCPs) authorised according to EMIR
Central Securities Depositories (CSDs) authorised according to the
Central Securities Depository Regulation
UCITS and their management companies authorised under the UCITS Consolidation Directive
AIFs managed by AIF managers authorised under the AIF Managers Directive
Occupational pensions institutions (IORPs) authorised under the IORP Directive
Third-country (non-EU) entities which would require authorisation or registration in accordance
with the aforementioned legislative points if the entity were established in the EU.
5.
What is the impact of the SFTR on Swiss firms?
The following graph shows the scenarios in which Swiss firms may be impacted by the SFTR.
6.
Which transactions and products are affected by the SFTR?
The regulation applies to total return swaps (as defined in the SFTR) and SFTs, which are defined as:
Repurchase
transactions for
securities,
commodities and
guaranteed rights
Lending and
borrowing
transactions on
securities and
commodities
Buy-sell backs and
sell-buy backs of
securities,
commodities and
guaranteed rights
Margin lending
transactions –
extending credit in
connection with the
purchase, sale,
carrying or trading of
securities – but not
other loans secured
by collateral in the
form of securities
7.
What are the main obligations imposed by the SFTR?
Reuse
Transparency of reuse of financial
instruments received under a
collateral agreement
SFTs
Reporting & Recordkeeping
Investors
Requirement to publish
information on the use of SFTs
and total return swaps
Firms that fall under the scope of the SFTR are subject to the following rules:
a. Transparency of reuse of financial instruments received under a collateral agreement
Stricter rules for the reuse (re-hypothecation) of collateral apply to any financial and non-financial counterparty
receiving collateral with a right of reuse established in the EU. It also applies to all their branches irrespective of where
they are located, as well as to the EU branches of counterparties established in a third country receiving collateral with
a right of reuse from an EU counterparty.
The definition of "reuse" is widely formulated to include not
only rights or reuse under a security interest, but also the
transfer of securities under a title transfer collateral
arrangement as follows:
"the use by a receiving counterparty, in its own name and on its own
account, or on the account of another counterparty, including any
natural person, of financial instruments received under a collateral
arrangement, such use comprising the transfer, title or exercise of a
right of use in accordance with Article 5 of Directive 2002/47/EC, but
not including the liquidation of a financial instrument in the event of
default of the providing counterparty".
Any right of counterparties to reuse financial instruments received as collateral shall be subject the following
conditions:
The
counterparty
providing the
collateral must
be duly
informed of the
risks and
consequences
of the reuse
The providing
counterparty
must grant its
prior express
consent
The financial
instruments
which are the
object of the
reuse must be
transferred
from the
account of the
providing
counterparty
Please note
• These requirements entered into force on 13 July 2016, including for collateral arrangements existing on
that date. This means current collateral arrangements must also be compliant with these new conditions.
Any pledge arrangement with a right of reuse and any agreement for the provision of collateral by way of
a title of transfer collateral arrangement is affected by this rule.
b. Reporting and record-keeping obligations of SFTs to registered or recognised trade repositories
Counterparties to SFTs are required to report specific data fields relating to any SFT they have concluded, as well as
any modification or termination thereof, to a registered or recognised trade repository no later than the working day
following the conclusion, modification or termination of the transaction (t+1). There is a dual-sided reporting
obligation. It is possible to delegate the reporting duty to a third party.
UCITS ManCos and AIFMs are responsible for reporting on behalf of the UCITS or AIF, respectively. The format,
frequency and content of the information to be reported will be determined in ESMA’s RTS, which shall be submitted
to the European Commission by 13 January 2017 1.
The reporting obligation applies to any financial and non-financial counterparty established in the EU that is a party to
certain SFTs. It also applies to all their branches, irrespective of where they are located, as well as the EU branches of
counterparties established in a third country. For Swiss entities, this means they must report all the details of any
securities financing transaction they have concluded (as well as any modification or termination thereof) as
counterparties to securities financing transactions to a registered or recognised trade repository. They must also keep
a record of any SFT concluded, modified or terminated for at least five years following the termination of the
transaction.
Please note
• Depending on the counterparty, the reporting duty will phase in as of Q1 2018, namely 12 months after
the date of entry into force of Level 2 measures.
• In contrast to the reporting obligation, there is no grace period for the record-keeping
requirement, which means that as of 12 January 2016, all counterparties (or their delegates subject to
contractual arrangements) must keep a record of any SFT they have concluded, modified or terminated for
at least five years following the termination of the transaction.
The SFTR level 1 text requires that the following data be included in the transaction reports:
Unique Trade Identifier
(UTI)
The principal amount
and currency
Securities or
commodities being lent
or borrowed (where
applicable) using ISIN
identifiers
Assets used as collateral
and their type, quality
and value. Position level
collateral data reporting
is permissible, where
this is appropriate
The method used to
provide collateral
Whether collateral is
available for reuse and
whether it has been reused (if it is
distinguishable from
other assets)
Cash collateral
reinvestment details (if
applicable)
Any substitution of the
collateral
The repo, lending fee /
rebate rate or margin
lending rate
Haircut
Value date, maturity
date and first callable
date
The parties to the SFT,
and when different, the
beneficiary of the rights
and obligations from it.
Market segment
1
ESMA is expected to publish draft technical standards by the end of 2016 specifying the details of the requirements.
c. Requirement to publish information on the use of SFTs and total return swaps
The SFTR requires the managers of undertakings for collective investment in transferable securities (UCITS) and
alternative investment fund managers (AIFMs) to disclose certain details to their investors regarding their funds' use
of SFTs and total return swaps, by way of:
Pre-contract disclosure:
Disclosure of the information presented in
Section B of the Annex to the SFTR in the
prospectus required under the UCITS
Directive or the pre-contractual
documents required under the AIFMD
Periodic reports:
Disclosure of the information presented in
Section A of the Annex to the SFTR in the
six monthly and annual reports required
under the UCITS Directive or the annual
report required under the AIFMD
Please refer to the table below for the information that is subject to disclosure.
Please note
• The disclosure requirements with regard to periodical reports will apply from 13 January 2017. The
requirements related to pre-contractual documents apply as of 12 January 2016 for newly constituted
UCITS and AIFs prior this date, and from 13 July 2017 for UCITS and AIFs constituted after to this date.
Information to be provided in the UCITS half-yearly and annual reports and
the AIF’s annual report (periodic reports) – Section A of the Annex
Global data
Data on collateral reuse
 amount of securities/commodities on loan as a
proportion of total lendable assets
 amount of assets engaged in each type of SFT or total
return swaps, expressed as an absolute amount and as a
proportion of AUM
 amount of collateral reused, compared with the
maximum amount disclosed to investors
 cash collateral reinvestment returns to fund
Concentration data
Safekeeping of collateral received by the fund as part
of SFTs and total return swaps
 ten largest collateral issuers across all SFTs and total
return swaps, with volume breakdown per issuer name
 top ten counterparties of each type of SFT and total
return swaps, including counterparty name and gross
volume of outstanding transactions
Aggregate transaction data for each type of SFT and total
return swaps
 type and quantity of collateral
 maturity tenor of collateral broken down into 7 maturity
buckets, ranging from less than 1 day to an open length
of time
 currency of collateral
 maturity tenor of SFTs and total return swaps broken
down by 7 maturity buckets, ranging from less than 1
day to an open length of time
 country in which the counterparties are established
 settlement and clearing of trade (e.g. tri-party, CCP,
bilateral)
 number and name of custodians, and amount of
collateral held in safekeeping by each
Safekeeping of collateral granted by the fund through
SFTs and total return swaps proportion of collateral
held in segregated, pooled or other accounts
Data on return and cost for each type of SFT and total
return swaps, broken down between fund, fund
manager and third parties (e.g. agent lender) in
absolute terms and as a percentage of overall returns
generated by relevant type of SFT and total return
swaps
Information to be provided to investors in pre-contractual documents – Section B of the Annex
General description of SFTs and total return swaps used
and the rationale for their use
 Overall data for each type of SFT and total return swaps
– type of assets
– maximum proportion of AUM they are subject to
– proportion of AUM they are expected to be subject to
Risk management, including risks linked to SFTs and
total return swaps, collateral management (such as
operational, liquidity, counterparty, custody and legal
risks) and risks of reuse
Specification of how assets received under a SFT, total
return swaps and collateral arrangement are kept, e.g.
with a fund custodian
Counterparty selection criteria (including legal status,
country of origin, minimum credit rating)
Specification of any restriction (regulatory or selfimposed) on reuse
Description of acceptable collateral with regard to asset
types, issuer, maturity, liquidity, diversification and
correlation
Policy on sharing the returns generated by SFTs and
total return swaps
 How much is returned to the fund?
 Cost and fees of the manager and third parties
(e.g. agent lenders)
 If the third parties are related parties to the manager,
then this must be disclosed
Collateral valuation methodology, including rationale and
whether daily mark-to-market and daily variation margin
is used
8.
Synergies with the reporting regime under EMIR
It was the intention of legislators that the SFTR rules be aligned to the main elements of EMIR, such as, among others,
the establishment of the reporting obligation (SFTR Article 4), the registration requirements for trade repositories
(SFTR Article 5) and the establishment of levels of access to data (SFTR Article 12), building on the sufficiency of some
of the controls already in place for registered trade repositories.
ESMA has established a robust supervisory regime under EMIR and is experienced in interacting with registered trade
repositories. As a result of its interactions with trade repositories, several amendments have been proposed to be
included in the technical standards for registration under the SFTR. According to ESMA, the draft technical standards
under the SFTR shall ensure a sound basis for achieving high quality data from the outset of the reporting obligation
under the SFTR, and constitute an excellent basis for the supervision of all the relevant risks related to shadow
banking activities.
In general, the SFTR follows the reporting requirements of EMIR. However, some peculiarities still need to be
considered, such as:
9.

If a securities financing transaction takes place between a financial counterparty and a small or medium sized
enterprise (SME), the financial counterparty must report on behalf of the SME.

UCITS management companies and AIFMs must report on behalf of their UCITS or AIF funds when these funds
are counterparties in securities financing transactions.

Members of the European System of Central Banks ('ESCB'), the Bank for International Settlements and EU
public bodies managing public debt are exempt from the reporting obligation under the SFTR. This is also true
for counterparties conducting securities financing transactions with the ESCB.

The definition of SFTs in the SFTR does not include derivative contracts as defined in EMIR. However, it
includes transactions commonly referred to as liquidity swaps and collateral swaps, which do not fall under the
definition of derivative contracts in EMIR.
Synergies with the collateral restrictions of MiFID II
The material scope of the collateral restrictions broadly overlaps with MiFID II. Unless a securities financing
transaction can be done in a way that is not a Title Transfer Collateral Arrangement (TTCA), it is subject to the rules
under MiFID II, as well as those under the SFTR. TTCAs are therefore prohibited for retail clients in all circumstances,
and for wholesale clients they will need to comply with both the MiFID II and SFTR documentation requirements.
10. How is ESMA handling the SFTR in the Supervisory Convergence
Working Program (SCWP)?
It is expected that ESMA will draft the Regulatory and Implementing Technical Standards under the SFTR in Q4 2016.
These standards shall include the definition of reports to be submitted to trade repositories and their format, the
information to be made available to competent authorities and the information to be provided to ESMA such that TRs
can be registered for SFTR purposes. ESMA is also empowered by the SFTR to develop Regulatory Technical
Standards on disclosures by UCITS and AIFMs.
In addition, ESMA’s “Markets Programme” shall support the development and implementation of new regulatory and
supervisory standards in this area. This program is specifically related to MiFIR/MiFID II and MAR, of which the
most difficult projects will include instrument reference data reporting, commodity derivatives position reporting and
the double volume cap mechanism. The program also includes the collection of other data sets to be published, and
initiatives within the Central Securities Depositories Regulation (CSDR), European Market Infrastructure Regulation
(EMIR) and Securities Financing Transactions Regulation (SFTR).
11. How can PwC help?
We support our clients with all of the tasks involved in implementing requirements and processes and drawing up
necessary documentation. In addition to taking advantage of our expert knowledge, our clients may especially benefit
from our many years of experience in implementing similar regulatory projects.
We can assist you in the following areas:





Knowledge transfer in topic-focused workshops
Impact analysis to identify how your firm is affected
Gap assessment of your business activities, organization, processes and documents
Project planning and management
Review of your IT architecture with respect to transaction reporting requirements
Let’s talk
Günther Dobrauz
Partner
Leader Legal FS Regulatory and Compliance Services
+41 58 792 14 92
[email protected]
Martin Liebi
Senior Manager
Legal FS Regulatory and Compliance Services
+41 58 792 28 86
[email protected]
Michael Taschner
Senior Manager
Legal FS Regulatory and Compliance Services
+41 58 792 10 87
[email protected]
Orkan Sahin
Senior
Legal FS Regulatory and Compliance Services
+41 58 792 19 94
[email protected]
PwC, Birchstrasse 160, Postfach, CH-8050 Zürich
www.pwc.ch