Reverse Stock Loans Reporting

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

Question:

How should reverse stock loans be reported?

Best Practice:

Companies should book the trades to the template that best fits (REPO) and annotate the trade agreement in Field 2.09 (Master Agreement Type) under which it is governed.

Else these trade types do not fit into the SLEB template, as this only facilitates the loan of securities.

See ESMA Guidelines on Reporting under Articles 4 and 12 SFTR - Section 4.2.5, point 36, pg.12:
Cash-driven SLBs, also known as "reverse securities loans", have to be reported as a repo. Where a cash-driven SLB is reported using the repo fields, it should be noted that the Master agreement type should reflect the relevant underlying agreement (e.g. GMSLA).

Reporting agents should note that the scope of SLB reporting in the MMSR Reporting Instructions version 3.6 has been significantly reduced in comparison to version 3.5. Following a consultation with reporting agents, it was concluded that restricting the reporting of SLBs against cash to reverse stock loans / reverse securities loans achieved the right balance in view of the reporting burden and the information required. The new reduced scope of SLBs against cash also provides alignment with the Securities Financing Transactions Regulation (SFTR), in that the guidance for SFTR considers reverse securities loans as fundamentally equivalent to a repo and requests that these types of SLBs be reported as a repurchase agreement rather than as a securities loan (see, for instance, Section 4.2.5 of ESMA Guidelines on Reporting under Articles 4 and 12 SFTR of 29/03/2021).

22 Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (OJ L 337, 23.12.2015, p. 1–34).

23 On occasion these structured trades may be referred to as ‘fixed cash pool’ transactions, to refer to the fact that the associated cash collateral is fixed instead of being varied to maintain margin like in ordinary ‘cash pool’

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-289)