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Securities Financing Transaction Regulation (SFTR)

Authored by: Bermet Dordoeva and Jaini Doshi, Synechron Business Consulting

Securities Financing Transaction Regulation (SFTR) is part of the European Commission’s strategy to reduce risks in the securities financing and derivatives markets by improving transparency. This is done by:

  • Imposing conditions on the re-use of collateral
  • Requiring managers of UCITS and AIFs to make detailed disclosures to their investors of the use they make of securities financing transactions and total return swaps
  • Requiring reporting of securities financing transactions to trade repositories

Financial and non-financial counterparties to securities financing and derivative transactions are facing challenging transparency and reporting requirements on collateral and its re-use. The reporting of collateral and its re-use is crucial to correctly assess and monitor financial stability and the creation of systemic risks over a chain of SFTs. The further away an SFT is from the source of securities posted, the greater are the risks involved. Here is an example to illustrate this:

  • Imagine counterparties A & B entering into SFT1, with counterparty A posting securities XX as collateral with counterparty B and granting counterparty B the right of re-use of XX.
  • Now counterparty B is entering into SFT2 with counterparty C where it is lending securities XX to counterparty C as part of SFT2; note that counterparty B only possesses securities XX while the source of XX is still counterparty A. Counterparty A can still be the owner of the securities depending on the collateral arrangement concluded.

If counterparty C defaults on returning securities XX to counterparty B at the maturity date of SFT2, it will lead to counterparty B defaulting to return XX to counterparty A at the maturity date of SFT1. This shows how SFT2 is riskier than SFT1, hence increasing systemic risks over a chain of SFTs.


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