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See also: Boredom heat-death of the universe.

The grandly-titled EU Regulation on Transparency of Securities Financing Transactions and of Reuse (2015/2365/EC (EUR Lex)) — to its friends the securities financing transactions regulation and around the kitchen table SFTR, is a large and pointless EU Regulation which causes unassuaged excitement among lawyers and profound ennui among everyone else.

Near-apocalypse caused by Art 15 title transfer disclosure statement

This is the regulatory initiative that, so say some commentators, nearly caused the boredom heat death of the universe when a well-meaning torpidity[1] of industry associations produced a 5,000 word disclosure document explaining to seasoned industry professionals (whom you would think would already know) what was meant by the expression “title transfer”.

This is mandated by Article 15 of SFTR. Firms engaging in such fripperies must send this disclosure to their counterparties wherever there is a title transfer collateral arrangement. Where, as in stock lending and collateralised derivatives trading, there is a mutual title transfer collateral arrangement (sometimes I have to post you collateral; sometimes you have to post me collateral), this leads to the faintly[2] absurd requirement for the counterparties to send each other the identical risk notification. WAY TO GO, ESMA. And heavens bless the Joint Chiefs of Staff of the Industry Associations contrived to make that simple statement — when you transfer legal title to your asset to me, it becomes mine, and you become my creditor for the return of an equivalent asset — fifteen pages long.

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 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).

SFTR versus EMIR: Regulatory Deathmatch

Can you be in scope for SFTR transaction reporting and in scope for 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 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:
    • 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 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
    • 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 CSA under an ISDA is deemed to be a separate transaction.
    • Therefore variation margin regulations are relevant to swaps, because the transactions themselves aren’t intrinsically collateralised.
  • “Real SFTR” transactions
    • The asset must be real, it must be 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)
    • Each transaction has its own collateral leg and is thus intrinsically collateralised: its value is “zeroed” each day
    • While operationally these collateral legs are usually aggregated across all outstanding transactions, the collateral movement on any day is not a “separate transaction in any sense”
    • Margin being built in, the variation margin regulations are less relevant.

The bloody minded among you could, no doubt, configure an 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
  • Daily re-striking of the transaction at zero against a commensurate transfer of eligible collateral assets one way or the other
  • Physical return of the same asset at termination against physical return of the equivalent prevailing collateral assets
  • General termination right for either party on a standard settlement cycle notice by redelivery of assets

A trade having these characteristics ought not trigger CSA movements as it would be permanently zeroed at the time where collateral demands were calculated. Such a trade would still come within the MiFID definition of a derivative contract (“options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances, or other derivative instruments, financial indices or financial measures which may be settled physically or in cash”) but I defy you to come up with a better solution for what ESMA thinks it means when it talks about liquidity swaps that don’t meet the MiFID definition of "derivatives".

Does this help?

See also


  1. A torpidity is the collective noun for a group of industry associations. True.
  2. There goes that British understatement again: I’m learning, after thirty years in these isles.