Returns Reporting 1

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Returns Reporting 1

Status: To Be Reviewed Last Updated: 31/08/2023

Question:
Validation field(s) in scope – 3.00

ISLA best practice was drafted to create a market aligned consensus on approach. It should be recognised that Securities Lending transactions differ in some respects to other financial markets. Specifically, economic exposure begins prior to settlement of the loan (collateralisation), and this exposure may continue after an agreed termination date. Exposure continues until both loan and collateral are terminated and returned to the respective parties. To adhere to the spirit of the regulation, ISLA member firm’s preference is to report data that best reflects any relevant exposure(s).

As it relates to this field, ISLA members therefore agreed to report:

• New Trades = Reported on contractual basis (i.e., by trade date +1)

• Returns = Reported on an actual basis (i.e., actual settlement date +1)

• Modifications = Reported on actual basis (i.e. effective date +1).

However, the Level 3 guidance published on 6th January 2020 contradicted proposed best practice which has resulted in misrepresented exposure reporting and increased the number of breaks:

• Partial Returns = Reported on a contractual rather than actual basis, regardless of settlement failure.

• Future dated Full Returns = Reported on a contractually on event date+1 by sending a MODI to add a ‘Maturity date’ and mark the trade as fixed term

• Same day Full Returns = Reported on an actual basis (i.e., actual settlement date + 1) by sending an ETRM

Marking an open trade as fixed term maturity may:

• Contradict legal and regulatory requirements of some lending funds (e.g. UCITS)

• Not be physically possible within agent lending programmes that represent multiple lenders in single external loans

Agent lenders, representing >60% Securities Lending market activity, cannot meet this requirement without significant long-term development.

Best Practice:
ISLA members propose that:

• All Securities Lending lifecycle events should be reported on an actual basis (rather than contractual)which will represent the most accurate refection of activity and counterparty exposure, and closely underpin the spirit of the regulation.

• Recognising the scope & limitations that exist outside the formal review process, ISLA propose that either a Q&A response or email be sent to clarify that it is acceptable industry practice to report loan closing events on the day settlement occurs, rather than a forward contractual date, which require complex systemic mappings. Similarly that partial returns be reportable on an actual rather than contractual basis. We believe this will provide supervisors with an accurate and the clearest possible view on exposures in our market, in keeping with the spirit of SFTR. ISLA members, in the Agent Lenders white paper, are seeking clarification that reporting returns on an actual settlement basis is acceptable, and that this will be considered as part of the SFTR review in 2022. (SFTR-337)