The Logic of the Phase-in

The reporting phase in which commences April 2020 sets off a series of go-live dates.

The sequencing seems to reflect the importance that these entities have in achieving the regulatory goal of the Securities Financing Transactions Regulation.

Right upfront, the ones that go live on April 12th, 2020 are credit institutions (a.k.a banks) and Investment Firms (the sell-side). These are most likely to be the entities that engage in most of the Securities Financing transactions, being at the cross-over point as it were, between transacting parties.

The next most engaged parties are the Central Clearing Counterparties and the Central Securities Depositories. Both have significant roles to play, systemically speaking. Cleared trades of every sort are given regulatory nudges as a preference over bilateral trades. So are tri-party collateral management systems (in which CSDs play a key role) to be preferred over the older method of passing securities around in each leg of the trade. So, these market infrastructure entities are the next to go-live on reporting on July 12, 2020.

Then come the customers, the end-users themselves. That covers UCITS (mutual funds to you), Insurance companies, reinsurance companies, pension funds and last but not the least - hedge funds. Hedge Funds are considered to be the most aggressive deployers of SFTs and also of Total Return Swaps. Prime-brokers lend against collateral quite routinely to their Hedge Fund clients. The buy-side firms need to go live with their reporting on October 12, 2020.

These firms would have had a good six months of a ring-side view before starting to report.

And the non-financial counterparties are kept for the last in January of 2021, allowing them to piggy-back on the collective experience of everyone that went before them.

We all know by now that it is not that only some of these have to report. It is not also that reporting by the sell-side is considered as providing sufficient information on what the buy-side is doing.

Everyone cited above must report every Securities Financing Transaction and that implies multiple reporting on the same trade. That then leads to the topic of matching up these reports flowing in from all sides and reconciling them.

But we have enough time for that somewhere in 2022.

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