ESMA deliver SFTR Level III guidance
28 May 2019 Paris
Image: Shutterstock
The European Securities and Markets Authority (ESMA) has delivered its Securities Financing Transactions Regulation (SFTR) Level III document, which sets out key explanatory details regarding the information to be submitted by trade repositories (TRs) to ESMA.
According to ESMA, such reporting enables the authority to conduct consistent supervision of TRs by aligning content and format of reports to ESMA’s supervision and its risk assessment processes.
Reporting of collateral re-use and cash reinvestment has been especially problematic. In section six of the paper, which deals with the tables of fields to be reported under SFTR, ESMA cited: “As highlighted in the regulatory technical standards (RTS), the logic that underpins Table 4 is different from the other tables, and will not be used for reconciliation, as this information cannot be linked to individual transactions.”
“Instead, non-cash collateral re-use, cash collateral reinvestment and funding sources shall be reported as aggregates at reporting entity level.”
Collateral re-use shall be reported using the formula agreed in the Financial Stability Board (FSB) framework and included in the RTS, ESMA notes in the paper. ESMA also clarified that cash reinvestment is reported as-is and not subject to the FSB formula.
ESMA outlined that the reporting obligation only applies to securities financing transactions (SFTs), which means that the collateral securities posted or received from other transactions are out of scope and that entities should not report their own assets.
This also means that the components of the re-use formula should not be reported separately to ESMA, the paper highlighted.
Instead, reporting entities should only provide the estimate that results from the application of the formula at ISIN level.
In terms of scope, this means that the collateral received, eligible for re-use captures securities received as collateral in reverse repos and BSB, and securities borrowed in securities borrowing transactions.
Additionally, it captures securities received as collateral in securities lending transactions and securities received as additional collateral to meet variation margin requirements originating from SFTs.
Elsewhere in the paper, ESMA responds to industry concerns by making significant amendments to dependency logic in the validation rules, including to buy-sell backs.
Reporting of collateral on general or specific terms has raised questions on approach. Discussing Approach A for the General Collateral Indicator, Market FinReg noted that for repos and BSB, general collateral would be the default option describing not only multi-collateral repos but also transactions in which single collateral is traded at (or close to) the prevailing GC rate, and repos in which cash is part of the collateral.
Market FinReg continued: “The second approach is to take a more restrictive definition of general collateral (GC) l, which would only apply in the context of GC facilities provided by an Automatic Trading System such as those run by CCPs, and transactions in which the collateral is managed by a triparty agent.”
“Aside from specific collateral transactions, the default option for all other SFTs would then be to do not take place on a GC facility but trade nonetheless at or close to the prevailing GC refinancing rate should be considered as general collateral.”
“Industry input suggests that reconciliation might be problematic in the first case as the two
counterparties may not rely on the same definition of general collateral.”
Seb Malik, head of financial law, Market FinReg, commented: “At long last SFTR level III guidance was delivered by ESMA yesterday, more than two years since its Final Report. The guidance is issued in the form of a Consultation Paper and answers many questions that the industry has been posing.”
Malik continued: “Standouts are the problematic Table 4 cash re-use which has been answered but for collateral re-use, indeed one will have to track one's inventory of the particular ISIN.”
“ESMA has also confirmed our stance on backloading - reporting pre-existing SFTs at go-live is unacceptable. ESMA has also made significant changes to the Excel validation specification that we previously disclosed to the public in January 2018."
ESMA invited comments on all matters in the paper and will consider all comments received by 29 July 2019.
According to ESMA, such reporting enables the authority to conduct consistent supervision of TRs by aligning content and format of reports to ESMA’s supervision and its risk assessment processes.
Reporting of collateral re-use and cash reinvestment has been especially problematic. In section six of the paper, which deals with the tables of fields to be reported under SFTR, ESMA cited: “As highlighted in the regulatory technical standards (RTS), the logic that underpins Table 4 is different from the other tables, and will not be used for reconciliation, as this information cannot be linked to individual transactions.”
“Instead, non-cash collateral re-use, cash collateral reinvestment and funding sources shall be reported as aggregates at reporting entity level.”
Collateral re-use shall be reported using the formula agreed in the Financial Stability Board (FSB) framework and included in the RTS, ESMA notes in the paper. ESMA also clarified that cash reinvestment is reported as-is and not subject to the FSB formula.
ESMA outlined that the reporting obligation only applies to securities financing transactions (SFTs), which means that the collateral securities posted or received from other transactions are out of scope and that entities should not report their own assets.
This also means that the components of the re-use formula should not be reported separately to ESMA, the paper highlighted.
Instead, reporting entities should only provide the estimate that results from the application of the formula at ISIN level.
In terms of scope, this means that the collateral received, eligible for re-use captures securities received as collateral in reverse repos and BSB, and securities borrowed in securities borrowing transactions.
Additionally, it captures securities received as collateral in securities lending transactions and securities received as additional collateral to meet variation margin requirements originating from SFTs.
Elsewhere in the paper, ESMA responds to industry concerns by making significant amendments to dependency logic in the validation rules, including to buy-sell backs.
Reporting of collateral on general or specific terms has raised questions on approach. Discussing Approach A for the General Collateral Indicator, Market FinReg noted that for repos and BSB, general collateral would be the default option describing not only multi-collateral repos but also transactions in which single collateral is traded at (or close to) the prevailing GC rate, and repos in which cash is part of the collateral.
Market FinReg continued: “The second approach is to take a more restrictive definition of general collateral (GC) l, which would only apply in the context of GC facilities provided by an Automatic Trading System such as those run by CCPs, and transactions in which the collateral is managed by a triparty agent.”
“Aside from specific collateral transactions, the default option for all other SFTs would then be to do not take place on a GC facility but trade nonetheless at or close to the prevailing GC refinancing rate should be considered as general collateral.”
“Industry input suggests that reconciliation might be problematic in the first case as the two
counterparties may not rely on the same definition of general collateral.”
Seb Malik, head of financial law, Market FinReg, commented: “At long last SFTR level III guidance was delivered by ESMA yesterday, more than two years since its Final Report. The guidance is issued in the form of a Consultation Paper and answers many questions that the industry has been posing.”
Malik continued: “Standouts are the problematic Table 4 cash re-use which has been answered but for collateral re-use, indeed one will have to track one's inventory of the particular ISIN.”
“ESMA has also confirmed our stance on backloading - reporting pre-existing SFTs at go-live is unacceptable. ESMA has also made significant changes to the Excel validation specification that we previously disclosed to the public in January 2018."
ESMA invited comments on all matters in the paper and will consider all comments received by 29 July 2019.
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