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Regulating Financial Transactions

In the world of finance, transparency is essential. The financial markets are complex, and ensuring that all transactions are recorded and reported correctly is crucial for the industry's stability. One of the ways that the European Union (EU) is attempting to improve transparency in the securities financing market is through the Securities Financing Transactions Regulation (SFTR). In this blog post, we'll explore what the SFTR is and why it's important.

What is the SFTR?

The SFTR is a regulation that was introduced by the EU in 2019. It aims to increase transparency in the securities financing market, which includes activities such as repurchase agreements, securities lending, and margin lending. These transactions are often used by financial institutions to obtain short-term financing or to lend securities to other market participants. The SFTR requires market participants to report details of these transactions to trade repositories (TRs).

The SFTR was introduced in response to the 2008 financial crisis, which highlighted the need for greater transparency in the financial markets. In particular, the crisis demonstrated the importance of understanding the interconnectedness of financial institutions and the risks that arise from their activities. The SFTR is designed to help regulators better understand these risks and to identify potential threats to financial stability.

What are the key requirements of the SFTR?

Under the SFTR, market participants are required to report a wide range of information about their securities financing transactions to a TR. This information includes:

  • The details of the transaction, such as the parties involved, the securities involved, and the terms of the agreement.

  • The collateral provided for the transaction, including its value and any haircuts applied.

  • The maturity of the transaction and any extensions or modifications that occur.

  • The financing rate or fee charged for the transaction.

The SFTR also imposes additional requirements on certain types of market participants. For example, financial institutions that engage in securities financing transactions must appoint a "trade repository access provider" to facilitate reporting to a TR. In addition, investment funds must disclose their use of securities financing transactions in their prospectuses.

Why is the SFTR important?

The SFTR is important for several reasons. First, it increases transparency in the securities financing market, which can help to identify potential risks to financial stability. By requiring market participants to report information about their transactions, regulators can gain a better understanding of the interconnectedness of financial institutions and the risks that arise from their activities. This information can also be used to monitor market trends and to identify potential market abuse.

Second, the SFTR helps to address the issue of shadow banking. Shadow banking refers to activities that are similar to traditional banking but take place outside of the regulated banking system. Securities financing transactions are a key component of shadow banking, and the SFTR helps to bring these activities within the regulatory framework. By requiring reporting of these transactions, the SFTR helps to ensure that they are subject to appropriate regulation and oversight.

Finally, the SFTR is part of a broader regulatory framework that aims to improve transparency and stability in the financial markets. Other regulations, such as the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Directive (MiFID II), also aim to improve transparency and reduce systemic risk. Together, these regulations help to ensure that the financial markets are fair, transparent, and stable.

How can Surety help?

Managing the compliance obligations associated with regulatory change such as the SFTR can be complex. The regulators expect documented, tested and evidenced controls to be in place, ensuring the risks associated with your business are understood and managed effectively. Compliance staff at regulated firms are often swamped with policies and procedures, risk reporting, horizon scanning, as well as the business data and management information required to do their jobs.

Surety simplifies this by becoming your central compliance brain. Our platform gives you the ability to align and assign your controls to the regulations that apply to you, and easily evidence that fact to your regulators! Spot your regulatory overlaps and underlaps, report to stakeholders and drive forward change projects by being fully informed.

When implementing regulatory change projects or assessing your impacts or exposures from new/changing regulation, Surety gives you the evidence and the insights to succeed.

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