SFTR

Regulation (EU) 2015/2365 of the European Parliament and of the Council on transparency of securities financing transactions (also known as the Securities Financing Transactions Regulation, SFTR) was provided after the financial crisis as part of the Commission’s plan to curb risks inherent in so-called shadow banking. The SFTR seeks to increase the transparency of securities financing transactions and of the reuse of financial instruments received as collateral, and to reduce the risks involved.

Securities financing transactions?

In the SFTR, a securities financing transaction refers to:

• a repurchase transaction (so-called repo transaction);
• securities or commodities lending and securities or commodities borrowing;
• a buy-sell back transaction or sell-buy back transaction;
• a margin lending transaction.

Reporting to the trade repository

The SFTR requires that both counterparties to a securities financing transaction report the details of the transaction concluded, as well as any modification or termination thereof, to a trade repository registered or recognised in accordance with Regulation. Those details shall be reported no later than the working day following the conclusion, modification or termination of the transaction.

The reporting obligation applies to all undertakings concluding securities financing transactions. However, where a financial counterparty (as defined specifically in the Regulation) concludes a financial transaction with a non-financial counterparty that does not exceed more than one of the following thresholds:

• balance sheet total: EUR 20,000,000
• turnover: EUR 40,000,000
• average number of employees during the financial year: 250

the financial counterparty shall be responsible for reporting on behalf of both counterparties to the trade repository.

Transparency of collective investment undertakings towards investors

The SFTR requires that disclosures to investors of investment funds and alternative investment funds specify, as provided in more detail in the Regulation, the securities financing transactions and total return swaps which may be used by the management company or alternative investment fund manager. In addition, management companies and AIFMs shall provide their investors, in the half-yearly and annual reports, more detailed information under the Regulation of how they have used securities financing transactions and total return swaps.

Reuse of financial instruments received as collateral

The SFTR also regulates at a general level (not solely limited to securities financing transactions) the conditions subject to which counterparties are allowed to reuse financial instruments received as collateral. The collateral arrangements to which this regulation applies may be collateral arrangements under the Act on Financial Collateral Arrangements (11/2004) based on the transfer of title, or rights of pledge involving the pledgee's right of use. Meanwhile, reuse refers herein to the use of financial instruments received by the beneficiary through a collateral arrangement, for example, sale or pledging as collateral, acting in its own name and on its own behalf. However, the SFTR does not restrict the application of more stringent sector-specific EU- or national legislation; for example, chapter 4 a, section 9 of the Act on Investment Services (747/2012) allows investment service providers to use financial collateral arrangements involving the transfer of ownership only with eligible counterparties and professional clients.