SFTR (Securities Financing Transaction Regulation)

Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012

SFTR includes:

The SFTR follows the FSB Policy Framework creating a Union framework under which details of SFTs (SL, BSB, Repo) and Total Return Swaps can be reported to trade repositories. The SFTR does not include derivative contracts defined in Regulation (EU) NO 648/2012 but transactions commonly referred to liquidity swaps and collateral swaps do not fall under (EU) No. 648/2012.

SFTs used for:

SFTs are used as source of funding, for liquidity and collateral management, as a yield-enhancement strategy, to cover short sales or for dividend tax arbitrage (cf. (8) SFTR).


  • (10) Reporting of details regarding SFTs concluded by all market participants whether they are financial or non-financial entities including the composition of the collateral, whether the collateral is available for reuse or has been reused, the substitution of collateral at the end of the day and the haircuts applied (cf. (10) SFTR). Legal framework laid down by this Regulation should be same as that of Regulation (EU) No 648/2012.
  • (16) Collective Investment undertakings used for Portfolio Management should disclose all relevant detailed information linked to the use of SFTs and total return swaps (16)

o   Transparency rules linked to Directive 2009/65/EC and 2011/61/EU (cf. (17) SFTR).

  • (18) The periodical reports produced by UCITS (Undertakings for collective investment in transferable securities) should be supplemented by the additional information on the use of SFTs and total return swaps.
  • (20) For SFTs and total return swaps a collective investment undertaking´s investment policy should be disclosed in the pre-contractual document e.g. within prospectus for UCITS and pre-contractual disclosure to investors of AIFs.
  • (22) Reuse: Minimum information requirements should be imposed to increase transparency. The exercise right to reuse should be reflected in the securities account of the providing counterparty except the account is governed by the law of a third country.

o   (23) SFTR should be read in addition to Directive 2002/47/EC

o   (24) The application of the reuse requirements should be deferred to six months after the date of entry into force of this Regulation.

o   (cf.Point (12) Article 3): Reuse means the use of financial instruments received under a collateral arrangement by a receiving counterparty e.g. transfer of title or exercise of a right of use….

Reason for SFTR:

(1) The financial crisis in 2007/2008 that revealed speculative activities, regulatory gaps, ineffective supervision and a lack of information for complex products, highlighted the need of more transparency and monitoring not only within the traditional banking sector  but also within shadow banking where non-banks (bank-like credit intermediaries) offering bank-like services (cf.(1)SFTR).

(9) Regarding financial stability Member States adopt divergent national measures that could create obstacles to the functioning of the internal market. The lack of harmonized transparency rules makes it difficult to compare micro-level data stemming from different Member States and thus to understand the real risks individual market participants pose to the system (cf. (9) SFTR).

(21) Reuse of collateral provides liquidity and enables counterparties to reduce funding costs but on the other hand create complex collateral chains between traditional banking and shadow banking rising financial stability risk. Risks in case of bankruptcy and lack of transparency can undermine confidence in counterparties.

Former published frameworks to SFTs:

Shadow banking risks for SFTs (Securities Financing Transactions) mainly Securities Lendings, Repos, BSB (as defined in Article 3 (7-9),(18) SFTR) have been already addressed by the Financial Stability Board (FSB) and the European Systemic Risk Board (ESRB) within the FSB Policy Framework in 2013 (cf.(2)SFTR) the Green Paper in 2012 (cf.(4) SFTR) and in the regulatory framework for haircuts on non-centrally cleared SFTS (published on 14.10.2014 by FSB;cf. ( cf.(3) SFTR) in which the risks of not properly collateralized SFTs have been identified. The report of an expert group chaired by Erkki Liikanen published in October 2012 listed shadow banking risks as high leverage and pro-cyclicality (cf. (5) SFTR).

Dependencies to the following Regulations:

–          (42) Transparency of SFTs and certain OTC derivatives (Total return swaps) closely linked to rules in Regulation No 648/2012. Clear delineation between OTC derivatives and ETD is needed irrespective if traded in the Union or in third-country markets.


Cf. Article 33 Deadline:

This Regulation shall apply from 12 January 2016 with the exception of:

  • Article 4 (T+1 Reporting obligation and safeguarding of SFTS) shall apply

o   12 months after the date of entry into force for financial counterparties defined in point (3 a,b) of Article 3 (investment firm and credit institution) and third-country entities referred to in point (3 i) of Article 3 in accordance with legislation referred to points (3a,b) of Article 3.  à12.01.2017

o   15 months after the date of entry for financial counterparties defined in (3g,h) of Article 3 (Central Counterparties, Central Securities Depository) and third-country entitites (3 i) of Article 3 referred to legislation of (3g,h).–>12.04.2017

o   18 months after the date of entry for financial counterparties defined in point (3 c-f) of Article 3 (Insurance undertaking, reinsurance undertaking, UCITS, AIF, institutions for occupational retirement provision) and respective third-country entities (3i) à12.07.2017

o   21 months after the date of entry for non-financial counterparties defined in Article 3 (4). à12.10.2017

  • Article 13 (Transparency of collective investment undertakings in periodical reports) shall apply from 13 January 2017
  • Article 14 (Transparency of collective investment undertakings in pre-contractual documents) shall apply from 13 July 2017
  • Article 15 (Reuse of financial instruments received under a collateral arrangement) shall apply from 13 July 2016 including existing collateral arrangements existing on that date.

This regulation shall be applicable in all Member States.

What is included in which article:

Article 4: Reporting obligation and safeguarding in respect of SFTs (extract with main points):

(cf. (1)):Counterparties to SFTs shall report the details, modification or termination of any SFT they have concluded not later than the working day following the conclusion, modification or termination (T+1) if the remaining maturity of those SFTs on that date exceeds 180 days or those SFTS have an open maturity and remain outstanding 180 days after that date.

(cf.(3)):Where a financial counterparty concludes an SFT with a non-financial counterparty…, the financial counterparty shall be responsible for reporting on behalf of both counterparties.

(cf.(4)): Counterparties shall keep a record of any SFT concluded, modified or terminated for at least five years following the termination of the transaction.

(cf.(9)): Reporting shall include:

–          Parties to the SFT and where different beneficiary of the rights and obligations arising

–          Principal amount

–          Currency

–          Assets and type used as collateral

–          Quality

–          Value

–          Method used to provide collateral

–          Whether collateral is available for reuse and whether it has been reused

–          Any substitution of collateral

–          Repurchase rate

–          Lending fee or margin lending rate

–          Any haircut

–          Value date

–          Maturity date

–          First callable date

–          Market segment

–          Depending on SFT the cash collateral reinvestment or securities or commodities being lent or borrowed

(cf. (10)): Format shall include:

–          Global legal entity identifiers (LEIS) or pre-LEIS until the global legal entity identifier system is fully implemented.

–          International securities identification numbers (ISINs)

–          Unique trade identifiers

Article 13 Transparency of collective investment undertakings in periodical reports (extract – main points):

(cf. (1)): UCITS management companies, UCITS investment companies and AIFMs shall inform investors on the use of SFTS and total return swaps as following:

–          UCITS management and investment companies: Half-yearly and annual reports referred to Article 68 of Directive 2009/65/EC

–          AIFMs: in the annual report referred to in Article 22 of Directive 2011/61/EU

Data that should be provided are defined in Section A of the Annex of SFTR.

Securities Financing Transactions further known as SFTs are collateralized products namely Securities Lendings, Repurchase Agreements and Sell-Buy Back transactions.

The  Securities Financing Transaction Regulation further known as SFTR focused on Securities Lendings (SL Borrowing/Lending), Repurchase Agreements (Repos, Reverse Repos), Sell-Buy-Backs (SBB, BSB) and Total Return Swaps (Credit Derivative) as defined in article 3 (7-9) and (18).

Article 14: Transparency of collective investment undertakings in pre-contractual documents (extract – main points):

(cf.1): UCITS management and investment companies as well as AIFMs should specify the SFT and total return swaps used in a clear statement in the UCITS prospectus (referred to article 69 of Directive 2009/65/EC) and the disclosure by AIFMS to investors (referred to Article 23(1) and (3) of Directive 2011/61/EU).

(cf.2): Prospectus and disclosure referred to in paragraph 1 shall include the data provided in Section B of the SFTR Annex.

Article 15: Reuse of financial instruments received under a collateral arrangement

(cf.1): The providing counterparty has granted its prior express consent to the reuse of financial instruments received as collateral by signature, in writing or in a legally equivalent manner The providing counterparty shall be informed in writing by the receiving counterparty of the risks (of default)and consequences granting a right of use of collateral under a security collateral arrangement and concluding a title transfer collateral arrangement.

(cf.2): Any exercise by counterparties of their right to reuse is undertaken in accordance with the terms specified in the collateral arrangement. The financial instruments received under a collateral arrangement are transferred from the account of the providing counterparty. Exception for third countries where other appropriate means are possible.

Main Definitions of products in Article 3

(7) Securities or commodities lending (SL) or securities or commodities borrowing means a transaction by which a counterparty transfers securities or commodities subject to a commitment that the borrower will return equivalent securities or commodities on a future date…

(8) Buy-sell back (BSB) transaction or sell-buy back (SBB) transaction means a transaction by which a counterparty buys or sells securities, commodities, or guaranteed rights relating to title to securities or commodities, agreeing, respectively, to sell or to buy back securities, commodities or such guaranteed rights of the same description at a specified price on a future date. For the counterparty buying the securities it is a BSB, for the counterparty selling them, it is a SBB. Not governed by a repurchase agreement…

(9) Repurchase transaction means a transaction governed by an agreement (Master Agreement) by which a counterparty transfers securities, commodities, or guaranteed rights relating to title to securities or commodities where that guarantee is issued by a recognized exchange which holds the rights to the securities or commodities. The agreement does not allow a counterparty to transfer or pledge a particular security or commodity to more than one counterparty at a time, subject to a commitment to repurchase them….

(18) Total return swap means a derivative contract defined in Point (7) of Article 2 of Regulation No 648/2012 in which one counterparty transfers the total economic performance, including income from interest and fees, gains and losses from price movements, and credit losses, of a reference obligation to another counterparty.

SFTs and Total return Swaps are used by managers of collective investment undertakings to get exposure to certain strategies or to enhance their returns. The use could increase the general risk profile of the collective investment undertaking whereas their use is not properly disclosed to investors (cf (15) SFTR).

Technical Standards:

(29)Technical Standards provided by ESMA ensuring efficient administrative and reporting processes.


(35) Union may adopt measures for SFTS and reuse of collateral.


Transactions with members of the European System of Central Banks (ESCB) should be exempted from the obligation to report SFTs to trade repositories.


(40) With assistance of ESMA, the European Commission will monitor and prepare reports to the European Parliament and the Council

Further information about SFTs and credit derivatives:

Differences between SL, BSB, Repo see:

http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/short-term-markets/Repo-Markets/frequently-asked-questions-on-repo/14-what-is-the-difference-between-repo-and-securities-lending/, retrieved on 31.05.2016

http://understand-financial-markets.blogspot.de/2011/01/difference-between-repo-securities.html, retrieved on 31.05.2016

Alternative Definitions from the web:

Credit Derivatives see:

http://www.frankfurt-school.de/clicnetclm/fileDownload.do?goid=000000056600AB4, retrieved on 31.05.2016

https://en.wikipedia.org/wiki/Total_return_swap, retrieved on 31.05.2016


Information about the new SFTR regulation retrieved from

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015R2365, on 16.06.2016.

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