Collateral

Cash Collateral Pool Marking

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
When cash collateral pools are marked for exposure management, should the increase/decrease in daily values be reported and, if so, how?

Best Practice:
Participants must ensure that the associated COLU template is sent daily and that the marked/re-rated value of the cash-pool is up-to-date when reported. This includes all settled and contractually expected collateral, therefore include anything that is due for that event date but not yet delivered or received.

ESMA Guidelines Reporting under Articles 4 and 12 SFTR: 06 January 2020

333. Collateral market value (Field 2.88) should be reported at fair value, excluding haircut. In
other words, the collateral market value should include all of the collateral posted by the
collateral provider, including pending but not-yet-settled collateral, before any haircut
deduction. (SFTR-338)

Factored Bonds

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
How should participants report the value of factored bonds, if received as collateral, if the market value of the bond in the trading system accounts for the factor but the price does not?

Should the price and market value be reported taking into account factoring (as there is no field to report the factor), thus the quantity multiplied by the price will not equal market value for these bonds?

Best Practice:
Where the market quoted price of a bond is subject to an adjustment to calculate the cash proceeds to be paid at settlement, a "pool factor" adjustment in the case of certain types of asset-backed securities, often referred to as a balloon payment structure, then:

Field 2.87 (Price Per Unit) should be the adjusted price which, when multiplied by Field 2.83 (Collateral Quantity or Nominal Amount) gives the settlement proceeds of the security, which should be equal to Field 2.88 (Collateral Market Value), therefore;

(Price Per Unit) x (Collateral Quantity or Nominal Amount) = (Collateral Market Value)

ESMA Guidelines Reporting under Articles 4 and 12 SFTR: 06 January 2020

Section 5.4.5,5, Paragraph 357, page 128.

357. The definition of Price per unit (Field 2.87) specifies that the value reported should include the accrued interest for interest-bearing securities, i.e. the dirty price. (This paragraph also provides examples of how to report price (dirty market price) in table 87).

Collateral market value needs to accurately reflect the market fair value and should include any margin.

335. For SLB, the haircut or margin (Field 2.89) should only include haircuts that apply to the collateral side. Margin requirements will instead be captured through the collateral market value (Field 2.88) and the cash collateral amount (Field 2.76). Thus, the collateral market value and cash collateral amount should also be updated with any add-ons (such as loan mark-ups) that start applying in the course of the transaction. (SFTR-294)

Pledged Collateral Within Triparty

Status: Best Practice Finalised, Last Updated: 10/08/2021

Question:
Where securities are borrowed bilaterally under a GMSLA (i.e. borrow HQLA and pledge lower quality collateral) and further collateral in pledged via a triparty agreement as part of the same arrangement, how should this be reported?

Best Practice:
The collateral transfer method is captured in reporting by Field 2.20 (Method Used to Provide Collateral), in which the following options are available:

• TTCA - title transfer collateral arrangement

• SICA - securities financial collateral arrangement

• SIUR - securities financial collateral arrangement with the right of use

However, the validation logic for this field is as follows:

• Field 2.72 (Uncollateralised [SL] Flag) is "FALSE", and

• Field 2.73 (Collateralisation of Net Exposure) is "FALSE", and

• Field 2.75 (Type of Collateral Component) is "SECU"

Best practice for non-cash collateral recommends that all collateral is reported on a net-exposure basis, therefore Field 2.73 will always be set to "TRUE" for SLEB transactions.

Consequently, Field 2.20 (Method Used to Provide Collateral) will not be reported in the NEWT template message. Therefore, participants will list all of their pledged collateral in a COLU message template, which does not include Field 2.20. (SFTR-283)

Mark to Market on Rebate Trades

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
When a Mark-to-Market (MTM) on a cash collateralised rebate trade is undertaken, should a MODI be reported to reflect the price change and a COLU to represent the cash amount of the mark?

Best Practice:
Most institutions send a VALU report every day because of the change in Field 2.57 (Market Value).

If there is mark to market on the loan and therefore a call for more collateral, then the expectation is that an amended COLU is also sent. Even if collateral positions do not change from day-to-day at a counterparty level, your collateral position should still be updated each working day, each COLU will overwrite the previous sent COLU and be considered the latest state at the TR. (SFTR-268)

Reporting Collateral Exposure Thresholds

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
Where it has been agreed with the counterparty that trades will be collateralised on a net-exposure basis, but subject to an exposure threshold that has not been met at the point of reporting, how should field 2.72 (Uncollateralised [SL] Flag) be populated?

Best Practice:
The guidance on Field 2.72 (Uncollateralised [SL] Flag) be populated is "Indication of whether the SL transaction is uncollateralised. This field shall not be used when the counterparties agree to collateralise the trade but the specific allocation of collateral is not yet known."

When an SFT is booked and the collateral threshold has not been met, then populate field Field 2.72 (Uncollateralised [SL] Flag) with "TRUE", to indicate the initial state when reporting the NEWT template message.

When the collateral threshold has been met or exceeded then populate Field 2.72 (Uncollateralised [SL] Flag) with "FALSE", to indicate the new state using the MODI template. (SFTR-260)

Letter of Credit as Collateral

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
How should Letters of Credit be reported under SFTR?

Best Practice:
Members who have Letter of Credit should refer to their legal and/or compliance department for guidance as there is nothing in the regulations that specifically reference LOCs.

For information, we note that some member firms have taken the view that LOC's are not reportable as no transfer of title occurs and collateral is not realised until a default scenario. (SFTR-249)

Free of Payment Cash Collateral - Reporting Legs of Trade Settling Independently

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
For free of payment (FOP), cash collateralised SFTs, how should these be reported where the collateral and the security settle on different settlement dates?

Best Practice:
There a potential reporting nuance with regards to a free-of-payment, cash collateralised SFTs. It is entirely possible for the security and cash legs to be returned or settled independently and on different days; in which case, would users expect the ETRM to only be sent once both legs have settled or should they expect to report a MODI to zero, followed by an ETRM?

In the following examples where counterparts transact a FOP cash-collateral trade, two separate reports would need to be sent for each:

1) If the security is partially returned by the borrower on day (x), and the cash collateral remains in custody of the lender and is not partially refunded until the following day (y), or

2) If the security is fully returned by the borrower on day (x), and the cash collateral remains in custody of the lender and is not fully refunded until the following day (y).

Example 1

• Send a MODI template message with Field 2.03 (Event Date) equal to day (x), reduce Field 2.83 (Collateral Quantity or Nominal Amount) to the remaining partial quantity and leave Field 2.76 (Cash Collateral Amount) as it is with the full cash collateral amount value.

• Send a MODI template message with Field 2.03 (Event Date) equal to day (y), leave Field 2.83 (Collateral Quantity or Nominal Amount) as it is and reduce Field 2.76 (Cash Collateral Amount) as to the remaining partial cash collateral amount value.

Example 2

• Send a MODI template message with Field 2.03 (Event Date) equal to day (x), reduce Field 2.83 (Collateral Quantity or Nominal Amount) to zero and leave Field 2.76 (Cash Collateral Amount) as it is with the full cash collateral amount value.

• Send an ETRM template message with Fields 2.03 (Event Date) and Field 2.15 (Terminations Date) equal to day (y). (SFTR-245)

Reporting Triparty Cash in-Lieu of Eligible Collateral

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
Where cash is received from triparty agent in-lieu of eligible securities collateral, how should this be reflected within daily COLU messages?

Best Practice:
Where cash is received from triparty agent in-lieu of eligible collateral it should be reported as part of the daily COLU message as "CASH" reflecting its end of day state. (SFTR-238)

Collateral Basket for Reverse Stock Loan

Status: Communications Review, Last Updated: 20/02/2024

Question:

For Reverse Stock Loans, how should the collateral report depict a basket of stock on a Repo construct, for example: cash delivered and many different stocks received as CLD's?

Each stock received will have different values, and value dates etc. There is one repo transaction, but many components, so how would the collateral trade associate the many lines of securities to the one row of cash that would be reported on the transactions tab?

Best Practice:

All securities taken as collateral should be reported on the COLU template message.

Field 2.01 (Unique Transaction Identifier) permits users to parse their collateral reporting to an individual SFT, therefore the UTI of the Reverse Stock Loan can be referenced here, with the corresponding field 2.74 (Value Date of the Collateral) also correctly populated.

Members should note that best practice for non-cash SFTs for securities lending SFTs is to report collateral on a net-exposure basis and to not attribute collateral to a specific loan/borrow SFT, even when on a 'bonds-borrowed' basis.

However, as reverse stock loans are a structured finance product, if single or multiple lines of stock collateral can be attributed to the loan of cash, then they should be reported as such in the collateral file when known.

Additional Insight into Best Practice reporting approach

1. Trade structures such as that outlined below present a unique problem, they are considered ‘Cash-driven’ securities loans whereby a larger Cash transaction is booked against multiple smaller Securities transactions. From a regulatory perspective these will be considered “Reverse Stock Loans”. Some features of Reverse Stock Loans are outlined below:

   • They will generally feature a relatively large cash sum
   • They will have multiple smaller securities positions
   • They are ‘cash-driven’ which means that changes in exposure are managed by changing the amount/value of outstanding securities each day

     • Note that this differs from a Borrow vs Cash or Borrow vs Cash-pool as in those cases exposure is managed by changing the outstanding Cash amount each day

   • This behaviour means the securities should be treated as collateral

1. Given that the multiple securities components and single cash component are part of the same trade structure, they must be reported under a single UTI. The problem this presents is that this cannot be done using the ‘SLEB’ reporting structure. This is however allowable using the ‘Repo’ reporting structure. Thus, a Reverse Stock Loan should be reported as below:

   • Loan side – The full cash amount should be reported on a single UTI (NEWT)
   • Collateral side – All individual securities should be reported as individual components of collateral (COLUs) under that same UTI

2. Suggested reporting is below:

   • The Cash Loan is reported as a NEWT on UTI123
   • Security 1 is reported as a COLU on UTI123
   • Security 2 is reported as a COLU on UTI123
   • Security 3 is reported as a COLU on UTI123

Why the Repo template is required over the SLEB template

It is not possible to report a reverse securities loan under SFTR using the loan and collateral data fields dedicated to securities lending by the RTS and ITS on-transaction reporting and the Validation Rules.

One obstacle to reporting reverse securities loans as securities loans arises from the fact that the SFTR reporting framework implicitly assumes, in the case of a transaction reported as a securities loan (Table 2, field 4, Type of SFT = SLEB), that any cash is identified as collateral while any security is identified as a loaned security.

The problem here is that the framework allows only one loaned security to be reported per transaction (Table 2, field 41, Security Identifier), whereas reverse securities loans typically involve multiple security issues.

It would be incorrect to try to resolve this problem by breaking up reverse securities loans into separate transactions each involving one security, which was one suggestion, as this approach would misrepresent the legal structure of the transaction and would also produce a set of apparently unrelated transactions.

Many of these could be terminated at different times, as they could be substituted, obscuring the true term of the exposure agreed by the parties. This approach would also be prohibitively complicated in view of the typical frequency and size of changes to the securities.

(SFTR-222)

Reporting Taiwanese Collateral

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
How should Taiwanese collateral be reported for SFT parties classified as "Offshore"?

Best Practice:
Regulatory market convention for pledged Taiwanese collateral obliges lenders to pay a notional rate of interest where the trading party is classified as "Offshore". This means that collateral should be booked and processed as a borrow transaction where the collateral is received and a loan where it was delivered, to correctly accrue the applied rates.

Based on member feedback, the most common practice is book collateral with a notional rate, e.g. 0.0001%.

Therefore, proprietary and vendor system owners need to include provisions recognise Taiwanese collateral booked as loans and borrows and transpose them correctly, to report them as collateral. (SFTR-163)

DBV Collateral Management

Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
How do we report stock loan DBVs (Delivery by Value) where cash collateral is exchanged for non-cash collateral?

Best Practice:
Intra-day cash movements are not reportable, only the component DBV allocation of securities themselves. However, when a counterparty is short of DBV collateral and uses cash to top-up the difference, this cash balance (normally held in a cash-pool) should also be reported in the end-of-day COLU message.

For financing DBV trades where cash is traded against non-cash collateral, this should be reported as a NEWT on the REPO template, and the non-cash allocation reported in the end-of-day COLU message. (SFTR-158)