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SFTR: Difference between revisions
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{{ | {{anat|sftr|}} | ||
''See also: [[Boredom heat-death]] of the universe.'' | |||
The grandly-titled {{tag|EU}} [[Regulation on Transparency of Securities Financing Transactions and of Reuse]] ({{eureg|2015|2365|EC}}) — to its friends the [[securities financing transactions regulation]] and around the kitchen table {{tag|SFTR}}, is a large and pointless {{tag|EU Regulation}} which causes unassuaged excitement among [[Mediocre lawyer|lawyers]] and profound ''[[ennui]]'' among everyone else. | |||
{{Art 15 SFTR disclosure document}} | |||
===[[Transaction reporting]]=== | |||
SFTR requires transaction reporting of [[securities financing]] arrangements. SFTR transaction reporting is different from [[EMIR]] and [[MIFID]] trade and transaction reporting — for one thing, the exact time and price of execution of a [[stock loan]] is less critical data point, seeing as either side can cancel a [[stock loan]] at any time without penalty (before or after settlement), so the time of decision to deal is moot — do you ever really become bound to trade a stock loan? Nor, really, is there a price at which you trade a stock loan, since ([[QED]]) a stock lender just delivers a share to the borrower, but keeps economic exposure to the price risk of the stock, while the borrower only takes economic exposure to a borrowed stock when (and if) the borrower [[Short selling|short sells]] it into the market — which is a different transaction (a [[cash equity]] sale), not connected to the [[stock loan]] — it is none of the lender’s business whether the borrower sells the stock or holds it — and if the borrower does sell the stock, that transaction would be covered by the EMIR transaction reporting regime (where decision to deal, price etc is important). | |||
==={{t|SFTR}} versus {{t|EMIR}}: Regulatory Deathmatch=== | ==={{t|SFTR}} versus {{t|EMIR}}: Regulatory Deathmatch=== | ||
Can you be in scope for {{t|SFTR}} transaction reporting ''and'' in scope for {{t|MiFID}} trade reporting? Some ESMA guidance is a little ambiguous on this point, espectially since, if you wanted to, | Can you be in scope for {{t|SFTR}} transaction reporting ''and'' in scope for {{t|MiFID}} trade reporting? Some [[ESMA]] guidance is a little ambiguous on this point, espectially since, if you wanted to, you could dress up a [[stock loan]] to look a lot like a [[derivative]]: | ||
To me the difference between a swap which | To [[me]] the difference between a ''real'' swap, which is out of scope for [[SFTR]], and a swap which is secretly a [[repo]]/[[stock loan]] and is ''in'' scope for [[SFTR]] is this: | ||
*'''Under “real derivative” swap transactions''': | *'''Under “real derivative” swap transactions''': | ||
**The [[reference asset]] is struck at a negotiated price – therefore [[best execution]] is important; | **The [[reference asset]] is struck at a negotiated price – therefore [[best execution]] is important; | ||
**There is a specified term, or at least an asymmetry in the parties’ termination rights so at least one party has some option value in the | **There is a specified term, or at least an asymmetry in the parties’ termination rights so at least one party has some option value in the transaction | ||
**The transaction can swing around in value (reflecting the price of the embedded option) - the transaction in isolation is not intrinsically collateralised: at any time after trade date it will have a mark-to-market value | **The transaction can swing around in value (reflecting the price of the embedded [[option]]) - the transaction in isolation is not intrinsically collateralised: at any time after trade date it will have a mark-to-market value | ||
**Any collateral arrangements take place outside the terms of specific transactions (and will be aggregated to cover net exposures | **Any collateral arrangements take place outside the terms of specific transactions (and will be aggregated to cover net exposures under all transactions under the Master). So, as you know, the {{t|CSA}} under an {{t|ISDA}} is deemed to be a separate transaction. | ||
**Therefore variation margin regulations are relevant to swaps, because the transactions themselves aren’t intrinsically collateralised. | **Therefore variation margin regulations are relevant to swaps, because the transactions themselves aren’t intrinsically collateralised. | ||
*'''“Real SFTR” transactions''' | *'''“Real SFTR” transactions''' | ||
**The asset | **The asset must be real, it must be [[Physical security|physically delivered]], rather than executed at a price, with a corresponding physical return obligation, so “[[best execution]]” on the asset in question is not relevant; | ||
**There is usually not a specific term, and either party can cancel at any time (therefore there is no option value) | **There is usually not a specific term, and either party can cancel at any time (therefore there is no option value) | ||
**Each transaction has its own collateral leg and is thus intrinsically collateralised: its value is “zeroed” each day | **Each transaction has its own collateral leg and is thus intrinsically collateralised: its value is “zeroed” each day | ||
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**Margin being built in, the variation margin regulations are less relevant. | **Margin being built in, the variation margin regulations are less relevant. | ||
The bloody minded | The [[bloody minded]] among you ''could'', no doubt, configure an {{t|ISDA}} transaction to have all the characteristics of a “real SFTR” transaction, but it would take quite a bit of legal engineering and it is hard to see why you would do it (other out of sheer professional pride in your capacity to be [[bloody-minded]], a force of nature one should not take lightly): | ||
*Initial exchange: Physical delivery of the reference asset against delivery of eligible collateral assets – hence “execution price” is moot | *Initial exchange: Physical delivery of the reference asset against delivery of eligible collateral assets – hence “execution price” is moot | ||
*Daily re-striking of the transaction at zero against a commensurate transfer of eligible collateral assets one way or the other | *Daily re-striking of the transaction at zero against a commensurate transfer of eligible collateral assets one way or the other | ||
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Does this help? | Does this help? | ||
{{sa}} | |||
*[[MiFID]] | |||
*[[EMIR]] | |||
*[[Boredom heat-death]] of the universe | |||
{{ref}} | |||