SFTR - Securities Financing Transaction Regulation

A regulation aimed at reducing systemic risk in transactions

European Parliament and Council Regulation (EU) 2015/2365 of 25 November 2015 on transparency of securities financing transactions and reuse (SFTR Regulation).

SFTR came into force in January 2016 and aims to reduce systemic risk in the securities financing transactions (SFTs) market through increased transparency and monitoring. Transaction reporting of SFTs started on 11 July 2020 with a step-by-step phasing in of the reporting commitment based on counterparty categories.

Implementation phases for SFTR Reporting in the EU and Norway

EU

• Phase 1: Investments firms and credit institutions *
• Phase 2: Central counterparties (CCPs) and central securities depositories (CSDs) *
• Phase 3: Other financial counterparties - i.e. insurance, UCITS, AIF, pension funds **
• Phase 4: Non Financial Counterparties (NFCs) ***

_{^{* 11 July 2020 (from April 11, 2020 due to Covid-19) ** 11 October 2020 *** 11 January 2020}}

Norway:

Norwegian entities' reporting requirements are divided into three phases:

• Phase 1: Investment banks and credit institutions (01.02.2025)
• Phase 2: Central counterparties (CCP) and central securities depositories (CSD) (01.08.2025)
• Phase 3: Financial entities such as insurance companies, UCITS funds, AIF funds, pension institutions, and non-financial counterparties (NFC) (01.11.2025)

Client Classification

Financial Counterparties (FC): Investment firms, credit institutions, insurance companies, UCITS management companies, alternative investment fund managers (AIFM/AIF), pension institutions, central counterparties, and central securities depositories.

Non-Financial Counterparties (NFC): Other entities than FCs established in the EU, EEA, or third countries.

Small and Medium-Sized Non-Financial Counterparties (SME NFC): SME NFCs are small NFCs that do not exceed the thresholds for at least two of the following three criteria: balance sheet of EUR 20 million, net turnover of EUR 40 million, and an average of 250 employees during the financial year.

Which transactions must be reported?

• REPO
• Buy-sell back & Sell-buy back
• Securities & Commodities Lending and Borrowing
• Margin Lending

Historic background

The Financial Stability Board (FSB) and the European Systemic Risk Board (ESRB) initiated in the wake of the financial crisis and increased focus on regulating financial markets work to map risks associated with "shadow banking" activities, or credit-related activities outside the mainstream banking system.

Securities financing transactions (SFTs) and reuse of collateral provided in connection with SFTs were identified as a source of funding in need of regulation. The work eventually led to an FSB policy supported by the G20 and SFTR is the European Commission's response to this.

SFTR was published in the Official Journal of the European Union on 23 December 2015 and authorized the EU ESMA to develop the regulatory technical standards (RTS) and the implementing technical standards (ITS) for the SFTR Regulation.

Scope and Coverage

Transactions carried out between parties established in the EU and EEA, including EU branches with third-country counterparties, are subject to the regulation. The regulation requires the parties in a transaction to report details of the transaction to a trade repository (TR) within T+1. Entities are also obligated to report any daily changes, collateral, and valuations throughout the life of the transaction.

The regulation covers the following specific areas:

1. Transaction reporting requirements for securities financing transactions (SFTs) for both financial and non-financial counterparties. This includes reporting at the initiation, modification, and termination of the transaction.
2. Collateral reporting requirements for securities financing transactions. Financial and non-financial counterparties must report details of the collateral provided or received in connection with the transaction.
3. Reporting requirements for the reuse of collateral in securities financing transactions. This includes details about which collateral is being reused and in which transactions it is utilized. The purpose is to reduce excessive reuse.
4. Reporting of collateral valuation. The reporting must include information about the market value of the collateral provided or received in connection with securities financing transactions.
5. Margin reporting of initial and variation margins for CCP transactions.

Requirements under SFT

1. LEI – Legal Entity Identifier

An LEI is mandatory for legal entities when entering into an SFT. Without an LEI, it will not be possible to report a transaction to a trade repository (TR).

2. Static Data

Client classification, sector code, and other static data are central for reporting SFTs and must be provided when engaging in delegated reporting.

3. UTI

Any SFT should be assigned a unique global transaction code (i.e. unique transaction identifier or UTI). An UTI shall be exchanged between the parties in advance of reporting the SFT to a TR. Before reporting, the parties must agree who will be responsible for generating and sharing the UTI. In the absence of an agreement, the UTI determination process follows ESMA's recommended waterfall methodology for generating an UTI. The party responsible for generating an UTI shall share this with the counterparty on an appropriate electronic format within a reasonable time so that both parties can meet their reporting requirements of T+1.

4. IHS Markit

DNB has entered into an agreement with IHS Markit/Pirum on the generation and sharing of UTIs as well as the ability to read/check/control reporting files before these are handed over to a TR. This also includes the possibility to carry out pre-matching.

When using ESMA's waterfall methodology, DNB will use IHS Markit to receive and share UTIs. For delegated reporting, DNB will assist the counterparty with access to the IHS Markit Non-member solution that provides access even if the party is not a member of IHS Markit

5. Pre-matching

SFTR operates with short deadlines for reporting (T+1). The number of data fields to be matched between the parties and limited matching tolerances has created a need for solutions that can address matching discrepancies between parties on the transaction date (T) and resolve them before the reporting deadline (T+1). There are several service providers that provide such pre-matching services. DNB is using IHS Markit/Pirums pre-matching platform. DNB will submit its reports through IHS Markit/Pirum for pre-matching before it is forwarded to the TR. Pre-matching will help both parties check and control their reports and uncover any discrepancies before reporting SFTs to the TR.

6. Trade Repositories, Pairing, and Matching

A trade repository (TR) is a central database that will receive information about SFTs and then publish this information at an aggregate level. TRs shall at the same time make the same information available in detail for local supervisory authorities and ESMA. The reporting has similar characteristics to the corresponding reporting obligation for information on derivative contracts under the EMIR. TRs shall be approved and registered by ESMA and are subject to the ESMAs supervision.

There are currently four TRs registered in accordance with SFTR:

• DTCC Derivatives Repository Plc (UK)
• Regis-TR S.A. (Luxembourg)
• UnaVista TradeEcho B.V. (Netherlands)
• National Securities Depository S.A. (Poland)

DNB has chosen DTCC as our TR for SFTR purposes. DTCC has also been selected as the TR for delegated reporting

Where both parties are subject to reporting obligations under the SFTR, both parties to an SFT are obligated to report the transaction to a TR. The TR will attempt to pair the two sides of the transactions based on a so-called UTI code. The TR will pair the transaction against its own register and with other TR registers. When an SFT is paired, the TR will then perform matching in line with ESMAs technical standards. A majority of the 155 reportable data fields under SFTR are subject to matching and there is a low tolerance for deviations when matching data fields.

Delegated reporting

Delegated reporting means that the delegating party (i.e. a party subject to the reporting obligation under SFTR) delegates the reporting of the details of the SFT to the reporting party, typically the financial counterparty in an SFT, which will then report both sides of the SFT for both parties.

SFTR distinguishes between mandatory delegated reporting and voluntary delegated reporting.

Mandatory delegated reporting applies to SME NFC- and means that where the counterparty to a SFT is a SME NFC- the financial counterpart (FC) is both the reporting party and responsible and accountable for ensuring reporting is correct and complete. The SME NFC- shall provide the FC receives the mandatory static data needed for reporting. Mandatory delegated reporting will apply from 01.02.2025 for EU clients and from 01.11.2025 for Norwegian clients.

Voluntary delegated reporting, as opposed to mandatory delegated reporting requires an agreement between the delegating and the reporting party. It allows for the delegation of the reporting obligation, but not the reporting requirement. For voluntary delegated reporting, the legal responsibility and accountability for complete and accurate reporting remain with the delegating party, not the reporting party. DNB will offer voluntary delegated reporting for EU counterparties starting from 01.02.2025 and for Norwegian counterparties depending on the corresponding phase.

Sanctions

SFTR requires states to impose sanctions for infringements of Art. 4 (SFTR reporting) and Art. 15 (reuse of collateral). One particularly relevant and highlighted form of sanction is administrative penalties. In Norway, the Financial Supervisory Authority of Norway will be given the power to impose such sanctions. SFTR stipulates maximum penalties of either EUR 5 million or EUR 15 million depending on the provision breached and whether the penalty shall be imposed on natural or legal persons. SFTR allow for the relevant EU/EEA state to set even higher penalty amounts in their local legislation. This has not suggested in Norway.

For infringements of the reporting obligation under Art. 4 a penalty of up to EUR 5 million (NOK 50 million) may be imposed for natural persons. Legal persons in breach of Art. 4 may be penalized with fines of up to EUR 5 million (NOK 50 million) or up to 10 per cent of the total annual turnover, according to the last approved annual accounts. In both cases, the fine could be set at three times the profit earned or losses avoided as a result of the infringement. This applies even if this results in a higher penalty than otherwise.

Contact

Please contact us if you have any questions related to SFTR and the information on this page.