Transaction Reporting Requirement -What You Need to Consider

The Securities Financing Transaction Regulation (SFTR)

Background - What is the SFTR?AspartofthepoliciesidentifiedbytheFinancialStabilityBoard(FSB)toincreasetransparencyacrossSecuritiesFinancingTransactions(SFTs),theEUintroducedtheSecuritiesFinanceTransactionRegulation(SFTR).TheregulationincludesanumberofnewrulesformarketparticipantsincludingarequirementtoreportallSFTstoaregisteredTradeRepository(TR).

EU Regulation 2015/2365 (SFTR)entered into effect on January 12th, 2016

Key Reporting Requirements - Article 4 • Counterpartieshavetoreportdetailsofthe‘conclusion, modification and termination’ofanySFTtoaregisteredtrade

repositoryonaT+1basis

• In addition to the reporting of the SFTs, counterparties also have to report the associated collateral to the trade repository on eitherT+1orvaluedatedependentonthemethodofcollateralisationused

• CounterpartiesalsoneedtokeeprecordsofanySFTforaminimumoffiveyearsfollowingitstermination

• PhasedreportingrequirementsareexpectedtobegininApril2018

SFTs in Scope • Securities loans and borrows

• Repurchasetransactions(includingBuy/Sellbacks)

• Commodities loans and borrows

• Primebrokeragemarginlendingtransactions

Who does it cover? • BothFinancialCounterparties(FCs)and

Non-FinancialCounterparties(NFCs)*

• EU based entities including their Non-EU based branches

• Non-EU entities where the SFT is concluded by an EU based branch

EU Counterparty Both Counterparty One Both Both

Non-EU Counterparty Counterparty Two Neither Counterparty Two Counterparty Two

Non-EU Based Branch of EU Entity Both Counterparty One Both Both

EU Based Branch of Non-EU Entity Both Counterparty One Both Both

Counterparty One

Counterparty Two EU Counterparty Non-EU Non-EU Based EU Based Branch Counterparty Branch of EU Entity of Non-EU Entity

The flexibility to outperform

*Some FCs trading with smaller NFCs will have a delegated reporting obligation on behalf of the NFC

Reporting Requirement by Counterparty Location

Detailed Reporting Requirements • TheSFTRreportingwillbeonaT+1basisinlinewithexistingregulatoryreportingregimes

• TheSFTRisatwo-sidedreportingrequirement,withbothcollateralgiverandcollateraltakerrequiredtoreporttheirsideofthe SFT to a registered TR

• Aspartofthetwo-sidedreportingobligationaUniqueTransactionIdentifier(UTI)mustbeincludedbyparticipantsintheirreportstotheTRs.ThisvaluewillbeusedbytheTRstomatchseparatelyreceivedreportsfromeachcounterparttoanSFT

• ParticipantsmustalsouseLegalEntityIdentifiers(LEIs)toidentifytheircounterpartsalongwithanumberofotherpartiesinvolvedintheSFT(e.g.AgentLenders,CSDs,CCPs)

• For agency loans with multiple underlying principals both borrower and lender will need to report each allocation to a principal as an individually reportable transaction

• TheSFTRreportingmustalsoincludeanycollaterallinkedtotheSFTsincludingtheLEIofthecounterpartywithwhothecollateral was exchanged and the master agreement under which it was agreed

• ESMApublishedaconsultationpaperonthereportingstandardsattheendofSeptember2016withadeadlineof30thNovember2016fortheindustrytoprovideanycommentsandresponses.ThefinalreportingstandardsareduetobesubmittedtotheEuropeanCommissionforendorsementaroundtheendofQ12017

Reporting Challenges & Impact Theproposedreportingrequirementswillposedifferingchallengestoallmarketparticipants.We’vesummarisedsomeofthekeyissuesbelowsothatparticipantscanbegintoassessthepotentialimpacttotheirfirm:

Requirement Challenge

Details of SFTs to be reported on T+1, related collateral to be reported between T+1 and value date

SomekeydetailswillnotbeavailabletobothcounterpartsonT+1incurrentprocesses, for example the information on principals to a trade on an agency loan

Matching UTIs need to be included on all SFTs by both counterparts

TradesbookeddirectlyinclientsystemswillnotautomaticallybeassignedaUTI.Additionallyatpointoftrade,agencyloansareusuallyagreedatthebulkedlevel,withtheprincipalinformationrequiredtocorrectlygenerateUTIsonlyreportedviatheAgencyLendingDisclosure(ALD)processpost-settlementdate

Counterparts need to be identified by LEIManymarketparticipantsarecurrentlyusinginternalcodestoidentifycounterpartsanddonothaveLEIsintheirprimarybooksandrecordssystems

ALD trades have to be reported at a principal level (e.g. one report per Beneficial Owner)

ALDinformationonlybecomesavailabletotheborrowingpartylaterintheprocess(oftenS+1orlater).Inaddition,non-disclosurerequirementsmeanthatinformationontheunderlyingprincipalsinanALDtradecanonlybeseenbyalimitednumberofauthorisedpeoplewithinthefirm(e.g.CreditandRisk)

Reporting of collateral related to SFTs

Most SFTs are covered by collateral pools with multiple ISINs exchanged to cover multiple SFTs.Foragencytradesasinglecollateralpoolwilloftenbeusedformultipleunderlyingprincipals and each ISIN delivered in the pool would be allocated to each principal on a pro-ratedbasis.TheinformationonthisprincipalallocationisonlymadeavailabletotheborrowerviatheALDprocesspostcollateralisationdate

Reporting templates require comprehensive transaction details

Someofthedatapointsincludedinthecurrentreportingframeworkareeitherheldindownstreamsystemsoroutsideofsystemsentirely.Thismayrequirefirmstoupgradeexistingsystemsandinfrastructuretofulfilthereportingrequirement

Counterparty Type Impact

Beneficial Owner

BeneficialOwnerswhoparticipateinanagencysecuritieslendingprogrammewillhaveareportingrequirementundertheSFTR.WheretheirlendingprogrammeismanagedbyanAgentLendertheymay receive delegated reporting however the responsibility to ensure this is completed remains with theBeneficialOwner.Inadditiontheremaybetransactions,forexamplereposconducteddirectlybythefunds,thatwillneedtobereporteddirectlybytheBeneficialOwner.

Borrower BorrowerswillhavetolinkagencytradestounderlyingprincipallevelinformationreceivedviatheALDprocess,howeverthismaybetechnicallydifficultduetothetimingandnatureofthecurrentALDprocessandfunctionallydifficultduetothenon-disclosednatureoftheinformation.

Agent Lender

AgencylendingstructurestypicallyinvolvelendingmultipleBeneficialOwnersassetsinasingletransaction,howeverthereportingrequirementwillbeatthelower,principallevel.AsborrowerswillneedthislevelofinformationtofulfiltheirsideofthereportingrequirementanincreasedemphasiswillbeplacedontheaccuracyandtimelinessoftheALDdatareceivedfromAgentLenders.

Prime Brokers Primerbrokerswillhavetoreportdetailsoftheirmarginlendingtohedgefundclients,including detailsoftheportfolioofassetsusedascollateral(e.g.shortsaleproceeds)aswellastheportfolioleverageratio.

Hedge FundsHedge funds that are in scope of the SFTR would also have to report their side of the margin loans receivedfromtheirPrimeBroker(s)

Phased Reporting Timeline ThereportinggolivedateiscurrentlyscheduledforApril2018(12monthsafterlevel2textcomesintoforce)withphasedrequirementscontinuinguntilQ12019.

How does SFTR affect you?

2016 2017 2018 2019

July 2018 (est.) Reporting CCPs and CSDs begin

October 2018 (est.) Reporting for insurance

firms, UCITS, AIFMs & pension funds

January 2019 (est.) Reporting requirements

for Non-Financial counterparties begin

April 2018 (est.) Reporting requirements

for investment firms and credit

institutions begin

April 2017 (est.)RTS on reporting enters into force

12th January 2016 SFTR enters

into force

GlobalLeadersinSecuritiesFinanceAutomation

The flexibility to outperform

Pirum Benefits - How can we help you? • Pirum has extensive experience in matching positions and will leverage existing contract compare functionality to generate

the UTIs needed for transaction reporting

• Generating UTIs from positions matched in Pirum will ensure SFTs submitted to the TRs will have a higher matching rate once reconciled in the TR process, reducing the amount of incorrect reports that counterparts need to review

• Pirumwillutiliseexistingcontractcomparefilesreceivedfromclientstocompilereports,reducingthetechnicaloverheadassociated with having to build new outputs and connections

• UTIs generated by Pirum can be received directly by clients for use in direct reporting to the TRs

• Pirum can also use the UTIs generated in combination with the SFT data already received to complete the full report for submission to the TR on the clients behalf, saving on the cost associated with building and maintaining an internal reporting solution

• WhenreportingonbehalfofclientsPirumcanalsoofferdataenrichmentforALDandanyotherrequiredfields.Thisreduces the burden on clients to spend their own technical resource on upgrading their existing systems to capture additionalfieldsrequiredfortheSFTRreporting

• Pirum has existing connections to BNY Mellon, Euroclear and JPMorgan Tri-party agents and already receives collateral dataonbehalfofclients.PirumcanusethiscollateraldatainconjunctionwithexistingclientfeedstocreatethecompleteSFTR report

• IntheESMAconsultationpublishedon30thSeptember2016theuseofa‘centralconfirmationplatform’togenerateUTIswasrecognisedintheproposed‘waterfall’methodologyapproach

Pirum SolutionAsanexistingleaderinthepost-tradematchingandreconciliationspacePirumwillbeofferingafullSFTRsolutionsowhateveryourreportingneedwe’vegotyoucovered.

Lender

Tri-party Agent

Trade Repository

Borrower

Tri-party Agent

Compare Feed(Including UTI’s & ALD Data)

Compare Feed(Including UTI’s)

Matching TransactionReporting including UTI’s

Collateral Data Collateral Data

UTI Feed UTI Feed

About PirumPirumSystemsisagloballeaderinsecuritiesfinanceautomationprovidingadvanced,centralisedandsecurereconciliationservicesforfinancialmarketparticipants.Pirumprovidesasecureprocessinghubwhichseamlesslylinksmarketparticipantstogetherallowingthemtoelectronicallyprocessandverifykeydetailsforstockloanandrepotransactions.

By combining an in-depth understanding of both the Securities Finance industry and IT, Pirum has created a set of highly innovative services.IntegrationwithPirum’sservicescouldnotbeeasier.Datafeedsareacceptedinvirtuallyanyformat,facilitatingthere-useofexistingdataextracts.

Noadditionalhardware,softwareorproprietarynetworkconnectionsarerequired.PirumserversperformallthenecessarydataprocessinganduseraccessisprovidedviasecurewebpagesovertheInternet.Thisflexibilityresultsinafast,straightforwardandlowcostimplementation.

Disclaimer This briefing is based on Pirum’s own interpretation of the SFTR as it stands at the time of writing and its view of the likely systems changes that will be required as a result. Pirum is not a law firm and this briefing must not be used as a substitute for legal advice from suitably qualified law professionals.

Website: www.pirum.com | Email: sftr@pirum.com | Telephone: 0207 220 0960

Next Steps Wewouldadvisefirmstoconsidertheregulationindepth,specificallythereportingrequirementsandbeginpreparingforitsentryintoforce.TofindoutmoreaboutourSFTRprojectpleasecontactusdirectly:

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CCP Gateway Connect with us

Front & Back Office

Duncan CarpenterStrategic Product Development duncan.carpenter@pirum.com

+44 (0) 207 220 0979

Robert KeaneProduct Development

robert.keane@pirum.com +44 (0) 207 220 0967

Robert FrostHead of Product Development

robert.frost@pirum.com +44 (0) 207 220 0969