Bonds Borrowed Reporting

>

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

Question:
How should bonds borrowed transactions be reported where lender believes the fee-based borrow (in exchange for the asset lent) to be collateral received, yet the borrower believes it to be a fee-based loan?

Best Practice:
OTC bond vs bond (fee based borrow vs fee-based loan) SFTs, creates an issue where participants move one bond in exchange with another for the same value, free of payment (FOP).

Each trade will have its own UTI settling in the market and the borrower would always see the fee based borrow as the principle reportable transaction and the fee-based loan as the collateral on this transaction. This could be a many-to-one or one-to many.

There is risk on the client counterparty offset to this, that they could report the collateral borrow as the transaction; effectively creating a single-sided orphan at the TR.

It has been opined that on the assumption that as participants are trading under a GMSLA 2010 (or earlier) then, regardless of theirs or their counterpart's perspective on the loan/borrow aspect, there is no contractual provision to apply a fee to collateral received. Therefore, irrespective of how they 'see' the collateral on this bonds borrowed transaction, they have to decouple the SFTs and report them in their component parts. This is confirmed by disclosure that each will generate its own UTI.

Example:

1. Counterparty A lends 1mm UK Govt Bonds #1 to Counterparty B at 0.25% = UTI1234

2. Counterparty B lends 1mm UK Govt Bonds #2 to Counterparty A at 0.25% = UTI98765

Under the reporting requirements you are both required to bilaterally report each SFT which will match at the TRs and not create an orphan, for either transaction. You will report the SFTs as uncollateralised and not send a COLU entry for either.

Field 1.09 (Counterparty Side) defines your perspective for each SFT. In option 1 in the above example, Counterparty A will be "TAKE". In option 2 in the above example, Counterparty A will be "GIVE". Counterparty B will be the opposite on both accounts.

This sounds like an oxymoron, in the sense that you are forced to define taking collateral when in fact you are not, but this is all that is available under the current RTS.

Field 2.72 (Uncollateralised [SL] Flag) will be "TRUE" for both Counterparty A and Counterparty B in both options in the above example. (SFTR-280)