Regulatory response to 2008
In the aftermath of the Lehman Brothers demise, regulators put the industry under scrutiny. A major area of concern was the securities finance business. This is a space where participants exchange cash for securities or securities for securities for a certain time period, using repurchase agreements (repos) as a key source of funding to manage liquidity and their balance sheets while ensuring they meet their obligations through securities lending and collateral transactions. With the complexity of transactions in this space, and the scales of exposure along the change, it is of little wonder that regulators started to question whether the securities finance markets were fit for purpose. The result of their scrutiny was SFTR: a law making it necessary to report the re-use of collateral and any other related information.

SFTR is an ambitious piece of regulation
Securities finance transactions, though not rocket science, can become quite complex. The trade itself, often concluded on a platform or via a bilateral agreement, must be reported using a Unique Transaction Identifier (UTI). Over the course of a transaction’s life-cycle, securities are exchanged or substituted. The value of the securities is usually measured on a daily basis to make sure the obligations arising from such an exchange are always covered. The quality of the securities also matters and should not be below investment grade bonds. The European Securities and Markets Authority (ESMA) requires that every element be reported, even information on every security (rating, issuer, etc) continuously. The report is around180 fields long and must be delivered daily to a trade repository (TR). But it does not end there; the TRs match the trades and life cycle events against each other – a gigantic reconciliation process spread across countries and institutions.

SFTR – the Swiss way
In the Swiss repo market, there are up to 60 non-domestic financial institutions trading with Swiss banks and insurances. Each of these institutions have overcome significant challenges to develop this reporting capability either on their own or through a strong partner. At the Swiss Stock Exchange we are completely committed to supporting our cross-border clients’ activities. For those active in the securities finance space and having built their own solution, SIX provides the UTI free of charge in a trade report through its new Collateral CockpitTM. In addition we provide an automated, ready-to-use SFTR report for those of our clients in need of greater support . And, given how resource-intensive the trade repository reporting process can be, SIX can scale up its offering so that our clients can fully trust their reporting to us.

Establishing transparent and efficient markets
Though briefly delayed by Covid-19, SFTR is poised to bring further transparency to the market. There are striking parallels between SFTR’s reporting provisions and the derivative reporting criteria outlined in the European Market Infrastructure Regulation (EMIR). Regulators, economists and the public will gain a better understanding of securities finance markets as a result of these disclosure rules, which can only be a positive development for the stability of the financial system as a whole. The endevaour is costly, but also an opportunity to understand the crucial inner workings of the system that support well-functioning financial services.