Stay up-to-date withflow newsbites>
Choose your preferred banking topics and we will send you updated emails based on your selection
Moreover, financial institutions must report information about their SFTs on a dual-sided basis, although this process can be delegated to third party service providers such as brokers or securities lending agents. Regardless of whether a financial institution harnesses a delegate reporting framework, as principal, they retain the regulatory responsibility for the accuracy and timing of the requisite filings. In this context counterparties should validate beforehand that any transactional data they are sharing with their trade repositories is aligned and accurate; otherwise it risks being rejected. Once reported, trade repositories will then validate and reconcile the data, before making the information accessible to the relevant regulatory body, which will evaluate it in order to identify developing systemic exposures of note.9
Additionally, affected organisations should provide a unique transaction identifier (UTI) for each reported trade and a legal entity identifier (LEI) for counterparts to the trades. Trade repositories have been instructed to reject any reported information without an LEI. However, ESMA announced back in January 2020 that it would give firms a one year LEI extension, amid growing regulatory concerns about the absence of proper global LEI coverage, especially for SFTs issued out of the US and Asia-Pacific (APAC).10 The International Securities Lending Association (ISLA), for example, said reported that 34% of assets held by custodian banks are missing an issuer LEI.11
Many financial institutions and investment funds have already been carrying out identical reporting requirements for exchange traded derivatives (ETDs) and over-the-counter (OTC) derivatives under the European Market Infrastructure Regulation (EMIR). However, SFTs can be quite complex trades as they are heavily intermediated and often reliant on manual processing. This, argue some industry experts, could make the SFTR reporting and compliance requirements much harder than the EMIR rules. However, firms should benefit from some of the experiences they picked up from EMIR.
In addition to the mandatory reporting to trade repositories, SFTR also requires that investment managers make periodic disclosures about their SFTs and total return swaps for UCITS funds and alternative investment funds once every six or 12 months, respectively. The rules also impose strict restrictions on collateral re-use, namely that counterparties must provide consent to any collateral re-use activities and be fully notified about the potential risks.