SFTR Reporting: What It Is and Why It Matters
Kārlis Grants
IT Solution Developer at SEB with Strong Analytical and Logical Thinking Skills
For financial institutions involved in securities financing transactions (SFTs) in the EU, adhering to regulatory reporting requirements is a fundamental responsibility. The Securities Financing Transactions Regulation (SFTR) establishes a framework for the transparency of SFTs, with a focus on the reporting and disclosure of detailed transaction data to relevant authorities. This regulation helps improve the oversight of collateralized lending and borrowing activities, reducing systemic risks within financial markets.
Legal Basis of SFTR Reporting
SFTR reporting is governed by EU Regulation 2015/2365 and is mandatory for all financial institutions that engage in SFTs, including banks, investment firms, and other financial market participants. This regulation mandates the reporting of SFTs to trade repositories, ensuring that authorities have a clear view of the size, structure, and risks associated with these transactions.
SFTR aims to enhance market transparency and to ensure that regulators can effectively monitor systemic risks related to securities financing. In addition to complying with SFTR, financial institutions must also adhere to other relevant EU regulations, such as MiFID II (Markets in Financial Instruments Directive) and EMIR (European Market Infrastructure Regulation). These regulations provide further oversight on financial markets and derivatives, but each regulation is distinct and focuses on different aspects of market activity.
What is SFTR Reporting?
SFTR reporting mandates that financial institutions provide regulators with comprehensive, near real-time transaction-level data for all securities financing transactions, including repos (repurchase agreements), securities lending, and margin lending. The data is submitted to a trade repository, which acts as a central data hub for these transactions. This enables regulators to assess market liquidity, funding risks, and counterparty exposure in a timely manner.
The European Securities and Markets Authority (ESMA) plays a key role in overseeing SFTR implementation and ensuring that financial entities comply with the regulation. The trade repositories receiving this data are registered and supervised by ESMA.
Key Components of SFTR Reporting
Financial institutions must report the following types of data for every SFT:
?? Transaction Data Institutions must provide granular details on each SFT, including:
?? Counterparty Data Institutions must report detailed counterparty information, including:
?? Securities Data SFT reporting requires the identification of the securities involved in the transactions, including:
?? Leverage and Liquidity Risk Data Institutions must report metrics related to their leverage positions, including the Leverage Ratio (LR) and Liquidity Coverage Ratio (LCR) in relation to their SFT activities. These metrics help regulators assess the liquidity risks in the market, particularly in cases of market stress.
?? Rehypothecation For SFTs involving rehypothecation (i.e., the use of borrowed securities as collateral for other transactions), institutions must provide details on the extent of rehypothecation and the specific arrangements with counterparties.
?? Action Type Reporting Each transaction has a lifecycle, and SFTR mandates reporting of the following Action Types:
?? Data Security SFTR reporting requires the implementation of strict data security protocols. This includes:
Submission Deadlines and Requirements
SFTR reporting imposes strict timelines for transaction reporting, typically requiring that institutions report their SFTs by the close of the next business day following the transaction. In some cases, financial institutions are required to report daily updates on ongoing transactions, especially if collateral values change or other modifications occur.
Failure to meet reporting deadlines or inaccuracies in reported data can lead to enforcement actions, including monetary penalties, reputational damage, and regulatory scrutiny. ESMA and local regulators can impose fines or restrict operations for non-compliance.
Challenges in SFTR Reporting
While SFTR reporting is crucial for financial transparency, it introduces several challenges for institutions:
?? Granularity of Data SFTs are often complex, involving multiple counterparties, collateral types, and transaction structures. Gathering and reporting all necessary data accurately, such as UTI generation, margin updates, and collateral values, can be time-consuming and prone to error.
?? Counterparty Coverage Reporting counterparties correctly requires institutions to manage the complexities of Legal Entity Identifiers (LEIs), which are essential for identifying all participants in an SFT. The process can become even more complex when dealing with counterparties in different jurisdictions.
?? Data Accuracy & Standardization Ensuring consistency in reporting formats and data accuracy is crucial for both compliance and effective oversight. Institutions must adhere to standardized reporting formats (e.g., ISO 20022 message schemas) to ensure seamless data exchange.
?? Reporting Lifecycle The lifecycle of an SFT involves multiple stages—new trades, modifications, margin updates, and terminations. Reporting each stage accurately is essential, as regulators need real-time visibility of the full transaction lifecycle to assess risks and exposures.
?? Reconciliation Trade repositories match and pair reported transactions to ensure data accuracy. This pairing and matching process ensures that reported transactions from both counterparties align correctly, and any discrepancies are flagged for review.
?? Bilateral vs. Triparty Trades Reporting requirements differ slightly between bilateral trades (transactions between two counterparties) and triparty trades (transactions involving a third-party agent, such as a custodian). Triparty trades often require additional reporting on the role of the third-party agent and their involvement in managing collateral.
?? Delegated Reporting Many institutions choose to outsource their SFTR reporting obligations to third-party service providers. This delegated reporting approach can help alleviate internal resource burdens but requires careful oversight to ensure that third parties adhere to regulatory requirements.
?? IT System Integration Integrating SFTR reporting into existing IT systems can be challenging, especially when dealing with multiple data sources, systems, and platforms. Institutions may need to upgrade their infrastructure or adopt specialized RegTech solutions for seamless reporting.
?? Cost of Compliance Meeting SFTR requirements can be costly, as it requires investment in new reporting infrastructure, staff training, and regulatory technology solutions.
Best Practices for SFTR Reporting
To streamline compliance and enhance reporting accuracy, institutions should follow these best practices:
? Stay Updated on Regulatory Changes Regularly monitor updates from ESMA and national regulators to ensure alignment with evolving SFTR requirements. This can help institutions avoid penalties and minimize operational risks.
? Leverage Regulatory Technology (RegTech) Adopting RegTech solutions such as trade reporting platforms, automated reconciliation tools, and AI-driven anomaly detection can significantly improve reporting accuracy and reduce manual effort. Technologies such as blockchain for transaction validation are also gaining traction.
? Invest in Data Quality Management Institutions should implement data validation checks and maintain clear data governance frameworks to ensure that transaction-level data is accurate, complete, and standardized.
? Ensure Clear Reporting Workflows Establish clear workflows for reporting different stages of the transaction lifecycle, including new trades, amendments, margin updates, and terminations. Proper workflow management will ensure compliance with the regulation’s reporting timelines.
? Enhance IT Infrastructure Upgrading internal reporting systems to handle high volumes of transactional data and integrating them with external trade repositories will improve efficiency and reduce reporting errors. Cloud-based solutions can offer scalability and ensure compliance with SFTR requirements.
? Train Compliance Teams Staff involved in regulatory reporting should be regularly trained on SFTR requirements and the tools needed for efficient data submission. This will help avoid errors and ensure consistent reporting practices.
Penalties for Non-Compliance
Failure to meet SFTR reporting requirements can result in substantial penalties. These may include:
For more detailed information on penalties, institutions should consult the ESMA website or relevant national regulators.
Validation Rules
Trade repositories apply various validation rules to ensure that reported data is accurate and complete. These rules include checks on the format, data consistency, and the correctness of identifiers (e.g., LEIs, ISINs). Reports that fail these validation checks will be rejected and must be resubmitted.
Future of SFTR Reporting
As financial institutions increasingly adopt automated and cloud-based solutions, real-time reporting will become more achievable. Future trends include: